Part C - Human Capital and the Romer Model Consider the following standard Romer Model and a variation that includes human capital. Standard Human Capital Goods Production Function Yt = AtLy,t Yt = AtLy,t Ideas Production Function ∆At+1 = ¯zAtLa,t ∆At+1 = ¯zAtHtLa,t Human Capital Production Function - Ht = Lh,t Resource Constraint Ly,t + La,t = L¯ Ly,t + La,t + Lh,t = L¯ Allocation of Labour La,t = γL¯ La,t = γL¯ Assume parameters take the following values in each specification. Standard Human Capital L¯ 1000 1000 Ly,t 750 700 La,t 250 200 Lh,t - 100 z¯ 0.0005 0.0005 A0 10 10 1. Explain what using labour to produce human capital implies for the economy? 2. Solve for the balanced growth path of output per capita in both models, showing all working. 3. Does the inclusion of human capital increase the rate of growth compared to the standard model? What is the impact on output in the short and long run?
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