Lecture_7_2010_M - Intermediate Macroeconomics Bruce Preston February 9 2010 Today • The Romer Model • Poverty traps — Some variations on the

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Unformatted text preview: Intermediate Macroeconomics Bruce Preston February 9, 2010 Today • The Romer Model • Poverty traps — Some variations on the Solow model What Have We Learned? • Main strengths: — Determinants of per capita incomes in the long run — Notions of dynamics and convergence • Main weaknesses: — Di > erences in investment rates cannot explain data W TFP accounts for most variation! — Does not explain di > erences in investment rates — Long-run growth ultimately “unexplained” The Economics of Ideas: The Romer Model • Framework that predicts long-run growth • Central idea: — distinction between “objects” and “ideas” Ideas • Ideas: instructions or recipes • Example: 20000 words in the English language — How many 100 word instructions can be made? 20000 100 — Larger than 10 430 — Even if 10 100 nonsense: still 10 330 — which is many more times the number of particles in the universe Nonrivalry: Public Goods • Ideas are non-rivalrous — My use doesn’t prohibit another’s use — Contrasts with many typical goods Increasing Returns • Sometimes the “standard replicating argument” fails — Consider pharmaceuticals Increasing Returns: Implications • Let D w denotes the stock of ideas • Consider a production function of the form \ w = D w N . w O 1 3 . w — What are its properties? Departures from Perfect Competition The Romer Model • Theory of Production: \ w = D w O |w — No physical capital — What are its properties? • The accumulation of ideas: { D w +1 = D w +1 3 D w = ¯ }D w O dw — ¯ } A a parameter The Labor Market • Keep things simple: fixed number of workers ¯ Q — Fraction ¯ o produce “ideas” — Fraction 1 3 ¯ o produce output < “objects” • Hence O dw = ¯ o ¯ Q O |w = ³ 1 3 ¯ o ´ ¯ Q — static labor market Solving the Model • The production function in per capita terms | w = \ w ¯ Q = D w O |w ¯ Q = D w ³ 1 3 ¯ o ´ • From the ideas accumulation equation { D w +1 D w = ¯ }O dw = ¯ } ¯ o ¯ Q — constant growth rate in the production of ideas — implies: D w = D (1 + ¯ j ) w where ¯ j = ¯ } ¯ o ¯ Q Balanced Growth...
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Lecture_7_2010_M - Intermediate Macroeconomics Bruce Preston February 9 2010 Today • The Romer Model • Poverty traps — Some variations on the

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