Question

Under the assumptions of the Romer model show graphically and explain how a population increase affects an economy’s long run growth rate.

Answer 1

The Romer model of endogenous growth as compared o the Solow model of exogenous growth focuses on the distinction between ideas and objects. The Romer model does not have diminishing returns to ideas because they are nonrival. This means that labor and ideas have increasing returns together and the returns to ideas are unrestricted. The Romer model as compared to Solow, for the long run has a balanced growth path – on which the growth rates of all endogenous variables are constant.

    The assumptions of the model lead to these inferences:

• Producing output requires knowledge and labor. The production function has constant returns to scale in objects alone but increasing returns to scale in objects and ideas. (Y = AK)
• New ideas depend on the existence of ideas in the previous period, the number of workers producing ideas, and their productivity.
• The number of workers producing ideas and the number of workers producing output sums up to the population. (L = L_A + L_Y)
• Some fraction of the population always produces ideas.

All other parameters held constant, a change in population changes the growth rate of knowledge. An increase in population will immediately and permanently raise the growth rate of per capita output. With the increase in population the labor force with nonrival ideas also increases, this increases in the GDP over the long run.

Log scale, initialized to 1.0 Population Per capita GDP - - - - - - 500 1500 2000 1000 Year