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Lecture 61 Macroeconomic Analysis 2003 Endogenous Growth: Romer Model Reference: Jones(2002:chapter 4& 5)

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Presentation on theme: "Lecture 61 Macroeconomic Analysis 2003 Endogenous Growth: Romer Model Reference: Jones(2002:chapter 4& 5)"— Presentation transcript:

1 Lecture 61 Macroeconomic Analysis 2003 Endogenous Growth: Romer Model Reference: Jones(2002:chapter 4& 5)

2 Lecture 62 a b c AS0 AS1 AD0 AD1 A better technology reduces production cost and AS shifts out Technology creates more jobs and income and raises demand Price Output Y0 Y1 P0 P1 Technology and Growth in AS-AD

3 Lecture 63 Y K Y=AK End. Growth Comparison of Production Technology in Endogenous and Solow Growth Models Solow In AK Model

4 Lecture 64 MPK K Marginal Product of Capital AK Model Solow Model 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.

5 Lecture 65 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.

6 Lecture 66 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 Year Earliest Patent No (applicati on) published 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 Growth of Idea: Number of Patent Rights in the UK

7 Lecture 67 Endogenous Growth Model

8 Lecture 68 Assuming Technological progress and Increase in R&D Share ss

9 Lecture 69 Time t = 0 Technological Growth Rate Over Time

10 Lecture 610 Time t = 0 Level of Technology (Stock of Knowledge) Over Time Level Effect

11 Lecture 611 Growth Rate of Knowledge and Population

12 Lecture 612 Link Between the Growth Rate of Per Capita Output and Capital Stock and the Knowledge

13 Lecture 613 Scientific Products of Research and Innovation (Economist, December 31, 1999) 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 Photography and Cinematography - Daguerre (1839) Telephone Bells (1876) Wireless (1896) Electro Magnetic Telegraph (1833) Powered flight (1903) X-ray Jet Engine PC Internet

14 Lecture 614

15 Lecture 615 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 (?)

16 Lecture 616 How Human Capital Contributes to the Economic Growth?

17 Lecture 617 Vast areas of Economically Meaningful of Research 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

18 Lecture 618 Economically Important Innovations: Product of Genius, Active and Risk-loving People (Forbes Dec 2002)

19 Lecture 619 Research Intermediate and Final Goods Sectors Research Intermediate sector Final goods X X set of new and Innovative ideas models Consultancy Apply knowledge in production 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 New knowledge derive from existing stock of knowledge

20 Lecture 620 Three Sectors in the Romers 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.

21 Lecture 621 Who Contributes More to Research in the Bigger Economy?

22 Lecture 622 Final goods sector

23 Lecture 623 Intermediate and Research Sectors X = ideas r = price of ideas A = stock of knowledge LA= number of people working in the knowledge sector

24 Lecture 624 Growth Rate of Knowledge

25 Lecture 625 Main Features of the Romer Model

26 Lecture 626 MC CS DWL PmPm MC R m R opt Why Market Under Provides Research? o Outcome of research is uncertain at the outset. Patents provide Monopoly rights for research firms. Profit of a Research firm Intellectual Property right: Patents Designs Trademark Copyright

27 Lecture 627 Economic reason for granting a patent right or subsidy to a research firm

28 Lecture 628 Growth is prevented by lack of optimal research for the following reasons

29 Lecture 629 Exercises Unbounded growth with AK Technology Link between research, intermediate and final goods sectors in Romers 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?

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