204A-slides02c

204A-slides02c - (2c)-P.1 New Growth: The Economics of...

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(2c)-P.1 New Growth: The Economics of Ideas (Main reference: Jones ch.4-5.) • Neoclassical growth modeling: Focus on capital accumulation • New growth theory: Focus on technology, ideas, explaining economic growth “endogenously” rather than assuming a growth trend. - Targeted towards finding “engines of growth” = processes that do not suffer from the curse of declining marginal returns - Accepting increasing returns to scale a/o phenomena inconsistent with perfect competition—models include imperfect competition • Starting point: Neoclassical growth model with standard production function: Output = F(capital, labor,. ..). Well described by a power function: Y = K ! ( AL ) 1 " • New element: Theory of what “A” means, how and why it increases, and what determines if and how fast it increases over time: Specific interpretation: A t =number of ideas/blueprints available at time t • Key insight: Ideas/blueprints can be used repeatedly without additional cost: they have naturally increasing returns to scale/zero marginal cost.
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(2c)-P.2 Motivation: The Curse of Declining Marginal Returns • Basic Solow model with constant A: Stagnant economy (pre-industrial?) Obstacle to growth: Declining MPK. Curved f(k) in the Solow diagram. Solutions: • Approach #1 (Solow): Assume A grows. Then ! ) / ( 1 / L K A L Y " = keeps shifting up. • Approach #2 (AK model): Assume K A Y ! = is linear, not curved. (As if α =1. Modified “A”) Yields endogenous growth w/o growth in scale factor A. Solves the problem by assumption. • Approach #3 (Lucas’ model): Assume skills grow in proportion to education: h u h ! " = ) 1 ( ! , where time is divided between work (share u) and education/training (1-u).
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This note was uploaded on 12/26/2011 for the course ECON 240a taught by Professor Staff during the Fall '08 term at UCSB.

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204A-slides02c - (2c)-P.1 New Growth: The Economics of...

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