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Macroeconomic Analysis 2003

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1 Macroeconomic Analysis 2003
Endogenous Growth: Romer Model Reference: Jones(2002:chapter 4& 5) Lecture 6

2 Technology and Growth in AS-AD
Technology creates more jobs and income and raises demand Price AS1 P0 a c P1 b AD1 A better technology reduces production cost and AS shifts out AD0 Y0 Y1 Output Lecture 6

3 Comparison of Production Technology in Endogenous and Solow Growth Models
Y=AK End. Growth Y Solow In AK Model K Lecture 6

4 Marginal Product of Capital
How is AK Technology possible? There is an increasing return scale to the knowledge. Many firms or people can use the same designs and formula at the same time or duplicate them many times in the production process. MPK AK Model Solow Model K Lecture 6

5 Does an Advancement in the Technology Increase the Real Wage Rate of Every one Equally?
With mobility of labour across regions and sectors introduction of new technology should increase wages of all types of workers But Wage rates in the high tech and manufacturing sectors have grown at higher rate than in the service sectors. New technology replaces old technology and people with obsolete technology may become redundant and may spend a long time before finding a new job. Lecture 6

6 Growth of Idea: Number of Patent Rights in the UK Year
                   Earliest Patent No  (application) published GB 2,000,001 GB 2,023,381 GB 2,050,131 GB 2,078,071 GB 2,100,561 GB 2,121,661 GB 2,141,611 GB 2,160,751 GB 2,176,681 GB 2.192,121 GB 2,206,271 GB 2,220,118                                                   GB 2,232,862 GB 2,245,131 GB 2,257,003 GB 2,268,036 GB 2,279,218 GB 2,290,445 GB 2,302,005 GB 2,314,495 GB 2,326,809 GB 2,338,877 GB 2,351,428 Lecture 6

7 Endogenous Growth Model
Lecture 6

8 Technological progress and Increase in R&D Share
ss Assuming Lecture 6

9 Technological Growth Rate Over Time
Lecture 6

10 Level of Technology (Stock of Knowledge) Over Time
Level Effect t = 0 Time Lecture 6

11 Growth Rate of Knowledge and Population
Lecture 6

12 Link Between the Growth Rate of Per Capita Output and Capital Stock and the Knowledge
Lecture 6

13 Scientific Products of Research and Innovation (Economist, December 31, 1999)
Photography and Cinematography - Daguerre (1839) Telephone Bells (1876) Wireless (1896) Electro Magnetic Telegraph (1833) Powered flight (1903) X-ray Jet Engine PC Internet Algebra - Arabs, India (0) Printing Press -Gutenberg 1440 Calculus - Newton (1684) Steam Engine - James Watt (1765) Electricity - Edison (1879) Computer- Babbage (1984) Radium Radio TV Lecture 6

14 http://www.bbc.co.uk/radio4/science/ http://www.bbc.co.uk/science/
Lecture 6

15 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 goods Examples Cars, computers, trains, planes, medicine, TV, Phone Internet, Rockets; high yielding varieties of crops, cloning (?) Lecture 6

16 How Human Capital Contributes to the Economic Growth?
Lecture 6

17 Vast areas of Economically Meaningful of Research http://www. hull. ac
Core Scientific research Sound, heat, radio, light, sound waves, radioactivity; forces, motion, power Energy, Electricity, Chemical formulas: elements, bonds compounds Genetics, medicine Electormagnetism, Outer space Deep Sea, Ocean and environment Mathematical and statistical theories Economic research (ESRC) Information about prices, income Estimation of elasticities of demand, supply behaviour of firms, labour supply behaviour of households, Substitution elasticities Revenue and spending decision of central and local government, trade and investment, inflow-outflow of capital Impacts of policies living standards Improved management practices Applied science (STRC) Use of scientific knowledge in building tools and in production process; laser, radar, automation, cenematograpy Diagnosis and Treatment of diseases Engineering of sophisticated machines, Buildings Social research Social engineering, Causes of Crimes Personal and communal disorders Rights and responsibilities of each individuals in a society, Wars and conflict resolution Lecture 6

18 Economically Important Innovations: Product of Genius, Active and Risk-loving People (Forbes Dec 2002) Lecture 6

19 Research Intermediate and Final Goods Sectors
X set of new and Innovative ideas models New knowledge derive from existing stock of knowledge Consultancy Apply knowledge in production X Research Sector Universities: scientific and technical knowledge Research centres such as ESRC, STRC, Bell Lab, microsoft Software companies Appliers: BT/BAE Financial institutions (LSE) Government organisations Factories: Rolls Royce Lecture 6

20 Three Sectors in the Romer’s Endogenous Growth Model
Research Sector: Universities/ research labs produce ideas Intermediate sector: Takes those ideas to make tools and machines Final Goods sector used those ideas to produce consumer goods. Lecture 6

21 Who Contributes More to Research in the Bigger Economy?
Lecture 6

22 Final goods sector Lecture 6

23 Intermediate and Research Sectors
X = ideas r = price of ideas A = stock of knowledge LA= number of people working in the knowledge sector Lecture 6

24 Growth Rate of Knowledge
Lecture 6

25 Main Features of the Romer Model
Lecture 6

26 Why Market Under Provides Research?
Intellectual Property right: Patents Designs Trademark Copyright CS Outcome of research is uncertain at the outset. Patents provide Monopoly rights for research firms. Pm DWL Profit of a Research firm MC MC o R m R opt Lecture 6

27 Economic reason for granting a patent right or subsidy
to a research firm Lecture 6

28 Growth is prevented by lack of optimal research for the following reasons
Lecture 6

29 Exercises Unbounded growth with AK Technology
Link between research, intermediate and final goods sectors in Romer’s Endogenous Growth Model Production function in the final goods sector Production function in the Research sector Why is not larger size of population necessarily an obstacle for economic growth? Intermediate markets for research products: how do research firms determine price of research products? Lecture 6


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