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Lecture 6 1
Endogenous GrowthModel: Romer Model
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Lecture 6 3
Three Sectors in the Romer¶s Endogenous
Growth Model
Research Sector: Un vers t es/ research
labs produce deas
Intermediate sector: Takes those deas to
make tools and mach nes
Final Goods sector used those deas to
produce consumer goods.
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Lecture 6 4
Research to Improve
the Economy:
The Big Market
Households
C u er
Firms ±
I e t r
Pr ucer
Banks ±
c I t tut
Ce tr B
C erc B
St c r et
Treasury ±
A c t
Pu c u
Revenue ± C ect r
Trade Unions er
Merchants and
Traders
± Wholesalers
± etailers
Rest of the World
(ROW) ±
Trading Partners
Multilateral
Organisation
S hools,Universities
Research Labs
ho Contributes More to Research in the Bigger Economy?
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Lecture 6 5
a
b
c
0
1
D0
D1better technology
reduces product on costand sh fts out
Technology creates
more jobs and ncomeand ra ses demand
r ce
OutputY0 Y1
0
1
Technology and Growth n - D
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Lecture 6 6
Does an Advancement in the Technology Increase the
Real Wage Rate of Every one Equally?
W th mob l ty of labour across reg ons and sectors
ntroduct on of new technology should ncrease
wages of all types of workersBut
Wage rates n the h gh tech and manufactur ng
sectors have grown at h gher rate than n the
serv ce sectors.
New technology replaces old technology and people w th obsolete technology may become
redundant and may spend a long t me before
f nd ng a new job.
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Lecture 6 7
ut ut: FE
Y AL K Y !
A = St of knowl
L our use: A y L L L
Change in the stock of knowledge: PJ P
H H A A L A L A !!
Gr owth r ate of knowledge: A
L A
A
A g A
A
PJ H
Capital Accumulation:
t I t K t K ! H 11
Mar ket clear ing: t t t I C Y !
Endogenous Growth Model
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Lecture 6 8
n A g g !
A
A
A
L s R '
A
L A
H
A R g
A
L s
A
L A
A
A g A
A
PJ H
1!P
0!J
ssuming
Technological progress and Increase in R&D Share
A y L L L !PJ
H A L A A !
ss
n A g g !
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Lecture 6 9
Time
A
A
n A g g !
t = 0
Technological Growth Rate Over Time
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Lecture 6 10
Timet = 0
A
Level of Technology (Stock of Knowledge) Over Time
Level Effect
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Lecture 6 11
Growth Rate of Knowledge and opulation
A
L A
A
A g A
A
PJ H !!
By log differentiation:
01 ! A
A
L
L
A
A
J P
P
P
0! An g g J P
Knowledge grows at: J
H
! n A
Higher the growth rate of population
More people can work in the research sector
Stock of knowledge increases and Output rises.
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Lecture 6 12
Ak y g g g !!
AL
Y y ! ; L
g A
g Y
g y
g
L
g
A
g
Y
g !0
Gr owth r ate of per capita output:
A g
L g
Y g !
Simi ar fr om AL K k !
Gr owth r ate of per capita capital stock:
A g
L g
K g !
Link Between the Growth Rate of Per apita Output
and apital Stock and the Knowledge
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Lecture 6 13
Scientif ic Products of Research and Innovation
(Economist, December 31, 1999)
lgebra - rabs, India (0)
Pr inting Press -Gutenberg1440
alculus - Newton (1684)
Steam Engine - James Watt(1765)
Electr icity - Edison (1879)
omputer- Babbage (1984)
Radium Radio
TV
Photography andinematography -
Daguerre (1839)
Telephone Bells (1876)
Wireless (1896) Electro Magnetic
Telegraph (1833)
Powered flight (1903)
X-ray
Jet Engine P
Internet
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Lecture 6 14
Endogenous Growth Model:Role of Human apital
Ideas come from sk illed trained people
These ideas are translated into tools
Ideas are non-r ivalrous; Many people can use it at
the same time can be found in books, journals,
manuals and papers and reports
Better tools allow production of more and high
quality goods
Examples
ars, computers, trains, planes, medicine, TV,Phone Internet, Rockets; high yielding var ieties
of crops, cloning (?)
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Lecture 6 15
How Human apital ontr i butes to the
Economic Growth?
Think ing New Ideas Formula Design
Software
ction Better Tools Machines
onsultancy
pplication More and
High QualityProducts
ars
omputersPlanes
Medicine
Trains etc.
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Lecture 6 16
Vast areas of Economically Meaningful of Researchhttp://www.hull.ac.uk/home/research_and_ innovation/index.html
ore Scientif ic research
Sound, heat, radio, light, sound waves,radioactivity; forces, motion, power
Energy, Electr icity,
hemical formulas: elements, bonds
compounds
Genetics, medicine
Electromagnetism,
Outer space
Deep Sea, Ocean and environment
Mathematical and statistical theor ies
Economic research (ESR )
Information about pr ices, incomeEstimation of elasticities of demand,
supply behaviour of f irms, labour
supply behaviour of households,
Substitution elasticities
Revenue and spending decision of
central and local government, trade and
investment, inflow-outflow of capital
Impacts of policies living standards
Improved management practices
pplied science (STR )
Use of scientif ic knowledge in building
tools and in production process; laser,
radar, automation, cenematograpy
Diagnosis and Treatment of diseases
Engineer ing of sophisticated machines,
Buildings
Social research
Social engineer ing, auses of r imes
Personal and communal disorders
R ights and responsi bilities of each
individuals in a society,
Wars and conflict resolution
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Lecture 6 17
Economically Important Innovations: Product of Genius,
ctive and R isk-loving People (Forbes Dec 2002)year Innovation year Innovation year Innovati
1917 Sneakers (Bowerman) 1940 Radar (Watson-Watt)
1918 Spectometer, Uranium 235 1942 Electronic digital computer 1964 Mainframe (IBM)1921 Tetrathyle lead (Midgley) 1945 Nuclear power Mouse
1923 Business Management (Sloan) 1948 LP (Goldmark) 1971 Microprocessor (Noyce)
1923 Multiple camera (Disney) 1949 Magnetic core memory (Wang) Answering machine (Poulsen
1924 Mutual funds 1947 Cellular phone (Ring) 1972 3-D images of body (MRI)
1924 Frozen food (Birdseye) Microwave (Spencer) Ethernet -LAN (Metcalf)
1925 Transistor, digital signal processor (Bell) Instant Photos (Land) Unix/C programming (Ritchi
1926 Rocket science (Goddard) Transistors (Shockley) E-entertainment (Bushnell)
1927 TV (Farnsworth) Tupperware (Tupper) 1976 DNA (Swansen)
1928 Penicillin (Fleming) 1951 Pill (Mccormick and Singer) Personal computer chips (Jo
1929 Synthetic rubber (Newland) 1952 FORTRAN (Backus) 1979 Spreadsheets (Bricklin and F
1930 Jet engine (Whittle) 1955 Fast food Krock) 1984 Dell PC (Dell)
1933 Radio frequency modulation (Armstron 1956 Containerised Shipping 1991 WWW (Bernerslee)
1937 Pulse code modulation Disk drives (Johnson) 1995 Internet business (Bezos)
Blood bank Fiber optics (Kapung) 1998 Viagra (Ellis and Terrett)
1938 Xerography (Carlson) 1958 Laser (Patel) 2000 Automated sequencing mac1939 Automatic transmission (Thompson) 1959 Integrated circuit 2001 ?
Helicopter (Sikorsky) 1961 diapers (Pampers) ?
1962 Modem (AT&T) 2002 ?
2003 Cloning?
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Lecture 6 18
Research Intermediate and Final Goods Sectors
Final goods
Intermediate sector
Research
§
A
j
j y x LY 1
1 E
j j j jrx x p4 X
onsultancy
pply knowledge
in production
Research Sector Universities: scientif ic
and technical knowledge
Research centres such as ESR ,
STR , Bell Lab, microsoft
Software companies
ppliers:BT/BAE
Financial institutions (LSE)
Government organisations
Factor ies: Rolls Royce
New knowledgeder ive from existing
stock of knowledge
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Lecture 6 19
Final goods sector Production
§ A
j
j y x LY 1
1 E
whe e j=1«.A index o ideas
A y y y x L x L x LY EEE
1
2
1
1
1...
nput Prices = mar ginal pr oduct
L
Y w E! 1
and
EEE 11
j y j x L p
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Lecture 6 20
ntermediate good sector:
ro it: j j j j r !
4
MR = MC princi ple implies that
r x p x x p j j j
!'or
r r
p
x x p p
E
1)('
1
1 !
!
y Resear ch sector
P
H A LdA !
H aver age pr oductivity in the r esear ch sector
PJ H H A
L A!
Intermediate and Research Sectors
X = ideas
r = pr ice of ideas
A = stock of knowledge
LA= number of people
work ing in the knowledgesector
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Lecture 6 21
Gr owth ate of knowledge
J
PH
!!1 A
L
A
dA A A
In Steady State stock of knowledge gr ows y the gr owth r ate of r esear chers:
J !1
n g
otal labour r esour ce can either be used in the knowledge sector or in the
pr oduction of f inal goods sector:
y L L L !
Growth Rate of Knowledge
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Lecture 6 22
M
S
DWL
Pm
M
R m R opt
Why Market Under Provides Research?
o
Outcome of research
is uncertain at the outset.
Patents provideMonopoly r ights
for research f irms.Prof it of a
Research f irm
Intellectual Property r ight:Patents
Designs
Trademark
opyr ight
http://www.intellectual-property.gov.uk/
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Lecture 6 23
ut put: F LY !100
F = f i ed labour
Cost: wLC !
Cost function: ¹ º
¸©ª
¨! F
Y wC
100
Constant margi al cost pr ici g: P w
Y
C !!xx
100
Decli i g average cost: ¹ º
¸©ª
¨!Y
F w
Y
C
100
Negative prof it: 0100100
¹ º ¸©
ª¨ !! F Y
wY w
C RT
Thus margi al cost pr ici g is not prof itable for a research
f irm. Government need to subsidise to produce optimal
amount of research.
Economic reason for granti g a patent r ight or subsidy
to a research f irm
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Lecture 6 24
Growth is prevented by lack of optimal research for
the following reasons
y Market values research according to the stream of prof it that are earned
from the new design but market does not see how the current research
raises productivity in the future.
y There is a missing market for research. Also there is positive externalityor ³spill over´ of current research and ³standing on the shoulder´ effect.
y There is a danger of ³stepping on toes´ there may be too many
researcher either dupli ating the same research work, whi h may provide
negative externality.
y There is ³too little´ research because of monopoly power due to patent
r ights though prof it incentives are vital for innovation of new ideas.