D0E29L6_1 - D0E29 - Theory of Economic Growth, Lecture 6...

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D0E29 - Theory of Economic Growth, Lecture 6 Anna Salomons 16 April 2008 A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 1 / 59
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Introduction to the Romer model Basic elements of the Romer model Evaluation of the Romer model The intuition behind growth in the Romer model Solving the aggregate model The micro-foundations of the Romer model ) readings: Sorensen ± Whitta-Jacobsen, chapters 9 and 10 A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 2 / 59
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Introduction to the Romer model Developed by Paul Romer and others in the 1980s and 1990s as a criticism to the Solow model General equilibrium model Macromodel built on microfoundations Model with market imperfections (in the intermediate goods market) Closed economy (Semi-)Endogenous growth model: the source of growth is (semi-)endogenously determined in the model Objective of the model: provide a more realistic view of the source of economic growth than the Solow model did A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 3 / 59
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Basic elements of the Romer model A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 4 / 59
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Basic elements of the Romer model Assume two sectors The R±D sector which produces "ideas" Let²s look at these two sectors in turn A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 5 / 59
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Assume, just as in the general Solow model, that production by a Y ( t ) = K ( t ) α [ A ( t ) L Y ( t )] 1 α with inputs K ( t ) and L Y ( t ) for a given A ( t ) . Remember that this production function exhibits constant returns to scale with respect to K ( t ) and L Y ( t ) Also remember that CRS and the assumption of a perfectly goods sector. A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 6 / 59
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Y ( t ) = K ( t ) α [ A ( t ) L Y ( t )] 1 α As before, the aggregate production function does not take A ( t ) as given such that it exhibits increasing returns to scale in K ( t ) , L Y ( t ) and A ( t ) which we need for growth in the steady state. That is, we need a production externality in the aggregate production function to get positive steady state growth in output per worker. A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 7 / 59
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"production function": ˙ A ( t ) = ¯ ϕ A ( t ) φ L A ( t ) with ¯ ϕ > 0 taking ¯ ϕ and A ( t ) as given. A. Salomons ( CES, KU Leuven) D0E29 L6 16 April 2008 8 / 59
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˙ A ( t ) = ¯ ϕ A ( t ) φ L A ( t ) with ¯ ϕ > 0 φ 6 = representative ±rm If φ > 0: "standing on shoulders" e/ect, in the sense that more technology leads to more technological progress
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This note was uploaded on 03/23/2010 for the course DOE 29 taught by Professor Goos during the Spring '10 term at Katholieke Universiteit Leuven.

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D0E29L6_1 - D0E29 - Theory of Economic Growth, Lecture 6...

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