Römer Model of Endogenous Growth Quiz

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Questions and Answers

What is the main driver of growth in the original Romer model?

Innovations that lead to the introduction of new (input) varieties

How is productivity growth influenced in the Romer model?

Productivity growth is influenced by increased specialization of labor and research spillovers.

What is the nature of ideas in the Romer model?

Nonrival and excludable

What aspect of growth does the Romer model fail to capture?

Role of exit or turnover in the growth process Signup and view all the answers

What motivates research activities in the Romer model?

Prospect of monopoly rents from new innovations Signup and view all the answers

In the Romer model, how are ideas classified in terms of rivalry and excludability?

Non-rivalrous and partially excludable Signup and view all the answers

What type of competition characterizes the final goods sector in the Romer model?

Perfect competition Signup and view all the answers

What type of firms dominate the intermediate goods sector in the Romer model?

Monopolistic firms Signup and view all the answers

What is the main input for the Research Sector in the Romer model?

Labor Signup and view all the answers

How is labor allocated between manufacturing the final good and research in the Romer model?

Labor must be split between Ly (manufacturing final good) and La (research) Signup and view all the answers

What is the assumption about total labor supply in the Romer model?

Total labor supply is assumed to be constant Signup and view all the answers

How do ideas contribute to economic growth in the Romer model?

Ideas drive economic growth by increasing productivity and expanding the production possibilities of the economy. Signup and view all the answers

What role does human capital play in the Romer model's view of technological progress?

Investment in human capital, such as education and training, enhances productivity and facilitates technological innovation. Signup and view all the answers

Explain how technological advancements occur in the Romer model.

Technological advancements occur endogenously through research, development, and innovation activities. Signup and view all the answers

What is the significance of ideas exhibiting increasing returns to scale in the Romer model?

As more ideas are generated and accumulated, the marginal productivity of ideas increases, leading to sustained growth. Signup and view all the answers

How can policies promoting innovation, education, and knowledge diffusion stimulate economic growth according to the Romer model?

Policies promoting innovation, education, and knowledge diffusion can stimulate technological progress and foster long-term economic growth. Signup and view all the answers

In what ways does the Romer model suggest policies can influence sustained economic growth?

Policies aimed at promoting innovation, education, and knowledge creation are crucial for fostering sustained economic growth. Signup and view all the answers

What is the pricing strategy of intermediate goods suppliers in the Romer model?

Charging a markup over their marginal cost Signup and view all the answers

How do supplier firms in the Romer model maximize their profits?

By taking into account the effect of their price on the final goods firm's order Signup and view all the answers

What role does the demand curve of the final goods firm play for the supplier firms in the Romer model?

It helps them determine the price to charge and maximize profits Signup and view all the answers

How does the Romer model ensure that supplier firms have an incentive to innovate?

By allowing them to reap profits based on the demand of the final goods firm Signup and view all the answers

Why do all supplier firms charge the same price in the Romer model?

Because capital is the only input in production and the demand curve is the same for all firms Signup and view all the answers

What determines the price set by the supplier firms in the Romer model?

1/α times R, where α is a number larger than one Signup and view all the answers

What is the significance of A in the Romer model with labor as R&D input?

The larger A is, the more productive the economy is. Signup and view all the answers

How does Romer explain the impact of having lots of types of intermediate goods to purchase?

Romer assumes that having lots of types of intermediate goods leads to better outcomes for final goods firms or consumers. Signup and view all the answers

What is the relationship between αY and RK in the Romer model with labor as R&D input?

RK = α^2*Y Signup and view all the answers

How is the rent of capital different in the Romer model compared to the Solow model?

In the Romer model, the rent of capital is represented by RK = α^2*Y, whereas the Solow model has a different calculation for the rent of capital. Signup and view all the answers

What is the marginal product of capital (MPK) in the Romer model?

MPK = αY/K Signup and view all the answers

Explain the relationship between K×MPK and αY in the Romer model.

K×MPK = αY Signup and view all the answers

Explain how the Romer model differs from the Solow growth model in terms of convergence of income levels among countries.

Romer model suggests that differences in technological progress and innovation capabilities can lead to divergence in income levels among countries, unlike the Solow model which predicts convergence to a steady state. Signup and view all the answers

What key factors does the Romer model emphasize to enhance economic growth?

The Romer model emphasizes R&D investment, support for education and training, protection of intellectual property rights, and fostering a conducive environment for entrepreneurship. Signup and view all the answers

Define endogenous economic growth and explain how it relates to the Romer model.

Endogenous economic growth refers to growth that arises from within an economy, not solely driven by external factors like capital investment or technological progress. The Romer model is an example of endogenous growth theory. Signup and view all the answers

How does the Romer model address the limitations of 'learning by doing' models?

The Romer model introduces the concept of R&D endogenous growth, which helps address the shortcomings of 'learning by doing' models. Signup and view all the answers

Explain the role of innovation and human capital accumulation in the Romer model for driving economic growth.

Innovation and human capital accumulation are crucial in the Romer model for achieving faster rates of economic growth and higher income levels over time. Signup and view all the answers

How does the Romer model suggest that differences in technological progress can impact income levels among countries?

Differences in technological progress, as highlighted by the Romer model, can lead to divergence in income levels among countries. Signup and view all the answers

Study Notes

Romer Model (1990) with Labor as R&D Input

The original Romer model assumes that labor is the only R&D input, aiming to generate endogenous growth.
Growth in this model is driven by innovations that lead to the introduction of new input varieties.
Productivity growth is driven by both increased specialization of labor and research spillovers, benefiting from the existing stock of innovations.
Ideas are non-rival, allowing free use by new innovators, and excludable, rewarding new innovations with monopoly rents.
The prospect of these rents motivates research activities aimed at discovering new varieties.

Limitations of the Model

The model does not capture the role of exit or turnover in the growth process, referred to as creative destruction by Schumpeter.

Labor Allocation

Labor can be used in either manufacturing the final good (Ly) or research (La).
The total labor supply L is assumed to be constant, and labor used in these two activities must add up to L.

Key Features of the Romer Model

The final goods sector produces the final good using labor and intermediate goods, sold to consumers.
The intermediate goods sector produces intermediate goods using capital, sold to the final goods sector.
The research sector accumulates technology and ideas, driving economic growth.

Implications for Convergence

Unlike the Solow growth model, the Romer model suggests that differences in technological progress and innovation capabilities can lead to divergence in income levels among countries.
Countries that invest in innovation and human capital accumulation are likely to experience faster rates of economic growth and higher income levels over time.

Ideas and Technological Progress

Ideas are non-rivalrous and can be shared and accumulated over time, driving economic growth by increasing productivity and expanding production possibilities.
Technological progress occurs endogenously through research, development, and innovation activities, exhibiting increasing returns to scale.
Policies that promote innovation, education, and knowledge diffusion can stimulate technological progress and foster long-term economic growth.

Intermediate Goods Firms

Intermediate goods firms purchase patents from the research sector and produce intermediate goods using capital.
Their revenues are the price of their good multiplied by the quantity sold, while their cost is the amount of capital they use, with a rental rate of R.
Suppliers firms maximize their profits, knowing they are monopolists in providing their intermediate good, and take into account the demand curve from the final goods firm.
The price that the supplier charges is equal to 1/α times R, with α being a number larger than one, and they reap profits from their markup.

Aggregate Outcomes

The economy, in aggregate terms, is equivalent to the simplified version of the Romer model, similar to the Solow model.
The larger the number of intermediate goods or ideas (A), the more productive the economy becomes.
Together with the capital accumulation equation, the dynamics of K and Y can be solved.

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Description

Explore the original Romer model which considers labour as the sole R&D input and aims to explain endogenous growth through innovations introducing new input varieties. Learn how productivity growth is driven by labor specialization, increased number of intermediate inputs, and research spillovers benefiting new innovators.

Romer Model of Endogenous Growth

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