chad_SG_ch6_sample - CHAPTER 6 Growth and Ideas OVERVIEW KEY CONCEPTS As a subsequent development to the Solow growth model the Romer growth model

chad_SG_ch6_sample - CHAPTER 6 Growth and Ideas OVERVIEW...

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61 Growth and Ideas CHAPTER 6 OVERVIEW As a subsequent development to the Solow growth model, the Romer growth model expands macroeconomists’ ability to address one of the most important questions about an economy’s growth experience; namely, how an economy can sustain growth over an extended period of time. This ability comes from including in the model a variable that accounts for the role of knowledge, both the level of exist- ing knowledge and the development of new ideas. This variable allows the model to explain sustained growth over long periods of time. A crucial insight into understanding this innovation comes from recognizing that knowledge and ideas do not wear out like machines and, while machines cannot be used in two places at once, knowledge and ideas can. Also crucial is the understanding that, if doubling capi- tal and labor leads to twice as much output, doubling capi- tal and labor and at the same time increasing the knowledge base of a country will more than double the amount of out- put it produces. We also must understand that ideas do not just fall from the sky. Firms require incentives to pursue research and development, especially when the process costs a lot and comes with no guarantee of success. This recognition and the fact that many research pursuits do not work out requires that firms depart from the competitive model and earn economic profit on those projects that turn out successfully. Finally, the combination of both the Solow and Romer growth models presented at the conclusion of this chapter provides a more complete understanding of an economy’s ability to exhibit sustained growth for long peri- ods of time, an explanation for differing growth rates across countries, as well as different levels of sustained growth. KEY CONCEPTS The idea diagram describes the chapter’s discussion of the economics of ideas as a progression from the distinc- tion between ideas and objects, to nonrivalry in the use of ideas, to their role in generating increasing returns, to the problems they create for using a model of pure competition to describe a country’s economy. Ideas are the ingredient in a production process that makes sustained economic growth possible. More formally, they are the instructions for arranging the raw materials of the universe in ways that transform them into useful products. While ideas often can be represented by something tangible, they begin as something unseen by the human eye and intangible to the human hand. Once shared, they fail the exclusion test for a private good, because they are nonrivalrous in use. As we see later, their use, whether in public or private goods or both, still leaves them available for additional uses with no diminished usefulness.
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