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Macroeconomic Analysis 2003

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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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 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

  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 http://www.patent.gov.uk/patent/history/oldnumbers/after1979.htm 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 t = 0 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. 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

  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 Researchhttp://www.hull.ac.uk/home/research_and_innovation/index.html 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 http://www.intellectual-property.gov.uk/ 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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