Consider Romer\'s model of endogenous growth. a). Suppose first that the product

Question

Consider Romer's model of endogenous growth.

a). Suppose first that the production function is as follows:

                                                   

where ? = 0.1 and ? = 0.

Using the equation in the text, what will be the growth rate of per capita income? In such a situation, under what circumstances might per capita income growth be increased?

b). Suppose instead that with the same production function ? = 0.1 and ?= 1.1. Once again using the equation in the text, what will be the growth rate of per capita income?

Consider Romer's model of endogenous growth. Suppose first that the production function is as follows: where ? = 0.1 and ? = 0. Using the equation in the text, what will be the growth rate of per capita income? In such a situation, under what circumstances might per capita income growth be increased? Suppose instead that with the same production function ? = 0.1 and ?= 1.1. Once again using the equation in the text, what will be the growth rate of per capita income?

Explanation / Answer

a)

Given the growth equation: g - n = b / (1 - a + b), per capita income growth will be zero. If there is no technological progress, per capita income will not grow.

b)

The growth rate will now be 1.1/[1-0.3+1.1] > 0. Growth is now endogenous

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