Political_Economist
New member
If the Romer model theorizes growth as resulting from positive externalities like technological or communication spill-overs that arise from increased investment and production, as opposed to technological "progress' (R&D and new technologies), then these externalities off-set dimishing returns and result in growth.
But if the solow model assumes dimishing returns that can only be overcome in the long run by technological advancement, then the real difference between the 2 models lies in the assumption of "Positive production spill-overs" are simply either able to cover diminishing returns or they are not.
This is from wikipedia that so-called outlines Romer's theory:
“Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. History teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.
Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up. They multiply.”
This does sound an awful lot like technological progress to me. If that is so, then what is the real difference between the solow model and the romer model?
Y = A K (alpha) L (1 minus alpha) versus "the same equation" but with economy-wide capital stock K(hyphen)
that means Romer agrees with the assumption of diminishing returns, but insists that there is positive spill-overs in the form of economy-wide capital stock.
so there is no real difference between the models surely? Romer just adds on this idea of positive externalities from production itself?
Thanks
But if the solow model assumes dimishing returns that can only be overcome in the long run by technological advancement, then the real difference between the 2 models lies in the assumption of "Positive production spill-overs" are simply either able to cover diminishing returns or they are not.
This is from wikipedia that so-called outlines Romer's theory:
“Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. History teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material.
Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. Possibilities do not add up. They multiply.”
This does sound an awful lot like technological progress to me. If that is so, then what is the real difference between the solow model and the romer model?
Y = A K (alpha) L (1 minus alpha) versus "the same equation" but with economy-wide capital stock K(hyphen)
that means Romer agrees with the assumption of diminishing returns, but insists that there is positive spill-overs in the form of economy-wide capital stock.
so there is no real difference between the models surely? Romer just adds on this idea of positive externalities from production itself?
Thanks