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GROWTH
PAUL M. ROMER (1994)
THE JOURNAL OF ECONOMIC PERSPECTIVES, VOL. 8, NO. 1, PP.
3-22
INTRODUCTION
(Abramoviz, 1986).
Includes only successfully industrialized economies. This biasness ensures the
convergence (De Long, 1988).
As a result, data by Heston-Summers(1991) was utilized to observe
convergence in broad sample of countries. This sample showed no faster growth
in poor countries than rich ones.
Growth models explaining the convergence ignore the two assumptions of neo
classical model(Romer, 1986 & Lucas,1988)
Technological change is exogenous
Y = A(t)
CONT.
Let a behavior of the economy can be summarized by the following equation
y = (1-)kk + A
y = (1-) [s- n] + A
First equation shows that the growth in output per worker is equal to
difference
Second equation shows how variation in the investment rate and in the level
of output per worker should translate into variation in the rate of growth
The author used two countries, Philippines and US, to determine the
CONT.
The functional form of model is given as:
Yj = A(K,L)Kj1-Lj
where variables with j are ones that firm can control and those without subscript
represent economy wide
= private effect of an increase in employment on output
A(K,L) = K L-
Y=
Where = = aggregate effect of an increase in employment
Using above equation, the author found that the convergence to the mean would
take place if all the variables are held constant.
CONT.
Barro and Martin (1992) explored the value of as 0.2, required to reconcile the
Mankiw,
Romer and Weil (1992) modify the two factor neoclassical model by
adding human capital in which the exponent of all the factors () is equal to 1/3
for their cross country regressions. Their model implies that the three-fold
increase in investment would offset 10 fold increase in output per worker in a
comparison across nations. So human capital would move from developed to
developing regions.
The neoclassical model by Robert Solow (1956, 1967) captured facts 1, 2, and 3,
that the private sector activities contribute to technological advance rather than
public sector funding for research (facts 4 & 5).
Richard Nelson and Sidney Winter (1982) developed an alternative evolutionary
CONT.
Nordhaus (1969) outlined a growth model which explains the
patents and monopoly power but this model is not endogenous one
as it takes exogenous technology as assumption.
Lucus (1988) included the human capital which has spillover effects.
This model accommodated facts 1-4 but left fact 5.
Whereas Romer (1986) included the expenditure on research and
development as the factor of production. This fact has spillover
effect on the level of technology. But this model assumed the
production function of degree one in all its inputs which violated the
fact 2 (research is not rival good) and fact 3 (only rival gods need to
be replicated to double output).
NEO-SCHUMPTERIAN GROWTH
Two steps are required for the emergence of these models:
1. Relaxing the assumption of aggregate models with many firms having market power
A= Whereas models showing steady state growth, fill in the blank with a constant and set the
exponent equal to 1.
. The author construct models of endogenous growth in which the level of output and its
rate of growth stayed finite for all time for a range of values of that were strictly
bigger than 1(Romer, 1983; 1986).
. The difference between the models with equal to one and those with greater than 1
is the difference between studying the phase plane of a nonlinear differential equation
CONCLUSION
The economics have been progressing, starting with models based on
POLICY IMPLICATIONS
This article offers policy-makers more insight than the standard neoclassical
access to the knowledge that already exists in the rest of the world?