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Macroeconomic Analysis 2003. Endogenous Growth: Romer Model Reference: Jones(2002:chapter 4& 5). Technology and Growth in AS-AD. AS0. Technology creates more jobs and income and raises demand. Price. AS1. P0. a. c. P1. b. AD1. A better technology reduces production cost

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slide1

Macroeconomic Analysis 2003

Endogenous Growth: Romer Model

Reference: Jones(2002:chapter 4& 5)

Lecture 6

slide2

Technology and Growth in AS-AD

AS0

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

Y1

Y0

Output

Lecture 6

slide3

Comparison of Production Technology in Endogenous and Solow Growth Models

Y=AK End. Growth

Y

Solow

In AK Model

K

Lecture 6

slide4

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

slide5

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

slide6

Growth of Idea: Number of Patent Rights in the UK

http://www.patent.gov.uk/patent/history/oldnumbers/after1979.htm

Lecture 6

link between the growth rate of per capita output and capital stock and the knowledge
Link Between the Growth Rate of Per Capita Output and Capital Stock and the Knowledge

Lecture 6

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

Scientific Products of Research and Innovation(Economist, December 31, 1999)

Lecture 6

slide14

http://www.bbc.co.uk/radio4/science/

http://www.bbc.co.uk/science/

Lecture 6

slide15

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

slide17
Vast areas of Economically Meaningful of Researchhttp://www.hull.ac.uk/home/research_and_innovation/index.html

Lecture 6

slide18

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

Lecture 6

research intermediate and final goods sectors
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

three sectors in the romer s endogenous growth model
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

intermediate and research sectors
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

why market under provides research
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

http://www.intellectual-property.gov.uk/

Lecture 6

exercises
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