Tutorial 2
ECON2102 - Macroeconomics II
Sustained Economic Growth
The Finance Minister has requested you more information about sustained economic growth. As a senior advisor, you are planning to propose and implement the Romer Model. In particular, you are thinking about the ideas production function:
∆At+1 = At La,t (1)
Your first task is to show the Finance Minister that the Ideas model has increasing returns to scale, you should also explain your intuition.
Patents and Growth
The Finance Minister is asking you how to prevent that some companies use ideas developed by other ones. The Finance Minister is concerned that it may deter R&D, but you quickly reply that imposing patents may attempt to exclude people and firms from using a particular idea. This means that new ideas do not fully add to the production process when they are granted. You need to modify the goods production function in the model to capture this idea to convince the Finance Minister. This modification can be done any way you want, but you need to explain your reasoning. (Note: You may also want to read the next section before deciding on the modification).
Balanced Growth
To convince the Finance Minister about the patents implementation, find the balanced growth path for GDP per capita with your modified Romer model. Is growth higher or lower in your model compared to the basic Romer model? Given your answer, do you think your model captures the effect of patents well? Explain the intuition.