Presentation on theme: "Economic Modelling Lecture 6 Human Capital, Technology (Knowledge),"— Presentation transcript:
1 Economic Modelling Lecture 6 Human Capital, Technology (Knowledge), R& D and Economic Growth
2 Exogenous Technology in the Solow Model does not explain technological growth, it is exogenous.
3 Endogenous Growth Model: Role of Human Capital Ideas come from skilled trained people.These ideas are translated into tools.Ideas are non-rivalrous; Many people can use it at the same time can be found in books, journals, manuals and papers and reports.Better tools allow production of more and high quality goodsExamplesRockets, Cars, computers, trains, planes, medicine, TV, Phone Internet, Rockets; high yielding varieties of crops, cloning (?)
4 How Human Capital Contributes to the Economic Growth?
5 Role of Human Capital in Production Y=f(k,h3)iy3Y=f(k,h2)y2Y=f(k,h1)y1k2k1k3It is possible to have increasing returns to scale with human capital in production.
6 Simple version of the Lucas Model = fraction of time spent on working(1-) fraction of time spent on studyingh = is human capital per worker, it depends on (1-)L = labour supply –(assume this as given)If K=100, L=100 h=3 =0.8, =0.3= 185 where with=100.
7 Constant, Increasing and Decreasing Returns to Scale Y = AKαLβConstant Return to Scale: α + β = 1When capital and labour inputs are increased by a certain factor t, output also increases by the factor of t.Increasing Return to Scale: α + β > 1If adding capital and labour input by a factor of t would increase output by more than factor of t.Decreasing Return to Scale: α + β < 1When adding inputs by factor t causes output to increase by less than factor of t.
8 Saving, Capital Accumulation and Output with Increasing return to Scale: AK Model yHigher saving rateimplies higher rate ofgrowth of output.In AK Modelk
9 Comparison of Production Technology in Endogenous and Solow Growth Models Y=AK End. GrowthYSolowIn AK ModelThree Sectors in the Romer’s Endogenous Growth ModelResearch Sector:Universities/ research labs produce ideasIntermediate sector:Takes those ideas to make tools and machinesFinal Goods sector use those ideasto produce consumer goods.K
10 Marginal Product of Capital How is AK Technology possible?There is an increasing return scaleto the knowledge. Many firms orpeople can use the same designsand formula at the same time orduplicate them many times in theproduction process.MPKAK ModelSolow ModelK
11 How does the technological advancement affect the per capita capital and per capita output in the steady state?Advanced TechnologyPrimitive Technology
12 Technology and Growth in AS-AD Technology creates more jobs and income and raises demandPriceAS1P0acP1bAD1A better technologyreduces production costand AS shifts outAD0Y0Y1Output
18 Why Market Under Provides Research? Intellectual Property right:PatentsDesignsTrademarkCopyrightCSOutcome of researchis uncertain at the outset.Patents provideMonopoly rightsfor research firms.PmDWLProfit of aResearch firmMCMCoR mR opt
19 Economic reason for granting a patent right or subsidy to a research firm (See Jones (2003) Problem 4.3)
20 ReferencesBlanchard (13)Aghion and Howitt ( 1998) Endogenous Growth Theory, MIT Press.Abramovitz, Moses (1986). Catching up, forging ahead and falling behind. Journal of Economic History, 46(2), June,Barro R. J.(1998) Determinant of Economic Growth: A Cross Country Empirical Study, Cambridge MA:MIT Press.Barro R. and Sala-I-Martin (1995) Economic Growth, McGraw Hill.Jones C. I. (1995) R & D-Based Models of Economic Growth, Journal of Political Economy, 103:4:Lucas R.E. (1988) "On the Mechanics of Economic Development", Journal ofMonetary Economics, 22, 3-42.Cameron Gavin (2003) Why Did UK Manufacturing ProductivityGrowth Slow Down in the 1970s and Speed Up in the 1980s?Economica, 70:Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy, vol. 98, no. 5. Pt. 2, pp. S71-S102.Temple, Jonathan R. W. (2001). Growth effects of education and social capital in the OECD countries. OECD Economic Studies, 33,
21 Economically Important Innovations: Product of Genius, Active and Risk-loving People (Forbes Dec 2002)