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Chapter 23: Problem 21

According to Romer, ideas and technological discoveries unlock the mystery of growth. He argues that ideas, especially those that can be contained in a piece of software, codified in a chemical formula, or used to improve organization of an assembly line, don't obey the law of diminishing returns. Ideas and knowledge build on each other and can be reproduced cheaply. Computers, networks, and software serve as his best illustrations of how ideas create prosperity. Explain which growth theory best describes the news clip.

Short Answer

Expert verified
The news clip best describes Romer's Endogenous Growth Theory.

Step by step solution

01

- Identify the Key Concept

The key concept mentioned in the news clip is the role of ideas and technological discoveries in economic growth. Focus on how these ideas do not obey the law of diminishing returns and can be reproduced cheaply.
02

- Understand Romer's Theory

Paul Romer's theory revolves around Endogenous Growth Theory. This theory emphasizes the role of technology, ideas, and human capital in driving economic growth from within the economy.
03

- Match the Key Points

Compare the key points from the news clip to Romer's Endogenous Growth Theory. Notice how the clip highlights ideas, software, and technological advancements—core aspects of Romer's theory.
04

- Determine the Best Fit

Based on the comparison, it is clear that Romer's Endogenous Growth Theory best describes the news clip. This theory explains how ideas can lead to sustainable economic growth without diminishing returns.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

headline of the respective core concept
Paul Romer's Endogenous Growth Theory is central to understanding modern economic growth. This theory suggests that technology, ideas, and human capital are the main engines of economic development. Traditional economic theories often fixate on physical capital and labor, but Romer shifted the focus to how innovation and knowledge create economic value.
Economic Growth
Economic growth refers to the increase in the output of goods and services in an economy over time. According to Romer's theory, this growth is driven by technological advancements and the generation of new ideas. Unlike traditional growth models that heavily depend on physical resources, Romer showed that ideas are limitless and can drive growth perpetually.

Economic growth is crucial because it:
  • Improves living standards
  • Increases employment opportunities
  • Boosts government revenues, allowing for more public services
Technology and Innovation
Technology and innovation are vital elements in Romer's Endogenous Growth Theory. Ideas that spark technological advancements do not wear out and can be used repeatedly. For instance:
  • Software programs can be replicated and disseminated widely at low cost
  • Innovations in manufacturing processes can significantly boost productivity
These advancements keep the economy progressing because they build upon existing knowledge, making each new idea more impactful than the last.
Non-Diminishing Returns
According to traditional economic theories, adding more of the same resource eventually leads to smaller increases in output, termed as 'diminishing returns.' Romer's theory contradicts this, emphasizing 'non-diminishing returns' in the realm of ideas and technology. When it comes to innovations:
  • Each new idea can lead to further ideas, creating a cycle of continuous growth
  • Knowledge and technological know-how can be endlessly leveraged to generate new wealth
This ensures sustained economic growth over time.
Human Capital
Human capital, which includes the skills, knowledge, and experience possessed by individuals, is another cornerstone of Romer's theory. Investments in education and training can amplify the rate of innovation. An educated and skilled workforce:
  • Is more adept at generating and implementing new ideas
  • Can quickly adopt and adapt to new technological advancements
Boosting human capital leads to a more dynamic and innovative economy.
Technological Advancements
Technological advancements are the linchpin of sustained economic growth in Romer's model. These advancements are often the result of intentional research and development (R&D) efforts. Important aspects include:
  • R&D investments lead to new and improved products and processes
  • Technological progress reduces production costs and enhances efficiency
These advancements contribute to a cycle of continual improvement and, ultimately, economic prosperity.

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Most popular questions from this chapter

Russia's real GDP (in U.S. dollars) was \(\$ 2.017\) trillion in 2012 and \(\$ 2.097\) trillion in 2013 Russia's population was 143.2 million in 2012 and 143.5 million in \(2013 .\) Calculate a. The growth rate of real GDP. b. The growth rate of real GDP per person. c. The approximate number of years it will take for real GDP per person in Russia to double if the current growth rate of real GDP is maintained.

China grows at around 9 percent a year, but its one-child policy will start to reduce the size of China's working-age population within the next 10 years. India, by contrast, will have an increasing working-age population for another generation at least. a. Given the expected population changes, do you think China or India will have the greater economic growth rate? Why? b. Would China's growth rate remain at 9 percent a year without the restriction on its population growth rate? c. India's population growth rate is 1.6 percent a year, and in 2005 its economic growth rate was 8 percent a year. China's population growth rate is 0.6 percent a year, and in 2005 its economic growth rate was 9 percent a year. In what year will real GDP per person double in each country?

In \(2013,\) Turkey's real GDP was growing at 4.1 percent a year and its population was growing at 1.26 percent a year. If these growth rates continued, in what year would Turkey's real GDP per person be twice what it is in 2013 ?

Turkey's real GDP (in U.S. dollars) was \(\$ 788.9\) billion in 2012 and \(\$ 822.1\) billion in 2013 Turkey's population was 74 million in 2012 and 74.93 million in \(2013 .\) Calculate a. The growth rate of GDP. b. The growth rate of real GDP per person. c. The approximate number of years it takes for GDP per person in Turkey to double if the 2013 growth rate of GDP and the population growth rate are maintained.

If a severe drought decreases labor productivity, explain what happens to a. Potential GDP. b. Employment. c. The real wage rate.
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