Economic Modelling Lecture 6 Human Capital, Technology (Knowledge), R& D and Economic Growth

Exogenous Technology in the Solow Model does not explain technological growth, it is exogenous.

Endogenous Growth Model: Role of Human Capital Ideas come from skilled trained people. These ideas are translated into tools. Ideas are non-rivalrous; Many people can use it at the same time can be found in books, journals, manuals and papers and reports. Better tools allow production of more and high quality goods Examples Rockets, Cars, computers, trains, planes, medicine, TV, Phone Internet, Rockets; high yielding varieties of crops, cloning (?)

How Human Capital Contributes to the Economic Growth?

Role of Human Capital in Production Y=f(k,h3) i y3 Y=f(k,h2) y2 Y=f(k,h1) y1 k2 k1 k3 It is possible to have increasing returns to scale with human capital in production.

Simple version of the Lucas Model  = fraction of time spent on working (1-) fraction of time spent on studying h = is human capital per worker, it depends on (1-) L = labour supply –(assume this as given) If K=100, L=100 h=3  =0.8, =0.3 = 185 where with =100.

Constant, Increasing and Decreasing Returns to Scale Y = AKαLβ Constant Return to Scale: α + β = 1 When capital and labour inputs are increased by a certain factor t, output also increases by the factor of t. Increasing Return to Scale: α + β > 1 If adding capital and labour input by a factor of t would increase output by more than factor of t. Decreasing Return to Scale: α + β < 1 When adding inputs by factor t causes output to increase by less than factor of t.

Saving, Capital Accumulation and Output with Increasing return to Scale: AK Model y Higher saving rate implies higher rate of growth of output. In AK Model k

Comparison of Production Technology in Endogenous and Solow Growth Models Y=AK End. Growth Y Solow In AK Model Three Sectors in the Romer’s Endogenous Growth Model Research Sector: Universities/ research labs produce ideas Intermediate sector: Takes those ideas to make tools and machines Final Goods sector use those ideas to produce consumer goods. K

Marginal Product of Capital How is AK Technology possible? There is an increasing return scale to the knowledge. Many firms or people can use the same designs and formula at the same time or duplicate them many times in the production process. MPK AK Model Solow Model K

How does the technological advancement affect the per capita capital and per capita output in the steady state? Advanced Technology Primitive Technology

Technology and Growth in AS-AD Technology creates more jobs and income and raises demand Price AS1 P0 a c P1 b AD1 A better technology reduces production cost and AS shifts out AD0 Y0 Y1 Output

Endogenous Growth Model

Increase in Real Wage Rate with Human Capital MPKh2 w1 MPKh1 Technological advancement raises wage rate but reduces Work hours.

Constant Marginal Product of Capital with Human Capital MPKh3 MPKh1 MPKh2 k1 k2 k3

What Can Policy Do to Improve the Human Capital and Technology?

Why Market Under Provides Research? Intellectual Property right: Patents Designs Trademark Copyright CS Outcome of research is uncertain at the outset. Patents provide Monopoly rights for research firms. Pm DWL Profit of a Research firm MC MC o R m R opt http://www.intellectual-property.gov.uk/

Economic reason for granting a patent right or subsidy to a research firm (See Jones (2003) Problem 4.3)

References Blanchard (13) Aghion and Howitt ( 1998) Endogenous Growth Theory, MIT Press. Abramovitz, Moses (1986). Catching up, forging ahead and falling behind. Journal of Economic History, 46(2), June, 386-406. Barro R. J.(1998) Determinant of Economic Growth: A Cross Country Empirical Study, Cambridge MA:MIT Press. Barro R. and Sala-I-Martin (1995) Economic Growth, McGraw Hill. Jones C. I. (1995) R & D-Based Models of Economic Growth, Journal of Political Economy, 103:4:759-784 Lucas R.E. (1988) "On the Mechanics of Economic Development", Journal of Monetary Economics, 22, 3-42. Cameron Gavin (2003) Why Did UK Manufacturing Productivity Growth Slow Down in the 1970s and Speed Up in the 1980s?Economica, 70:121-141 Romer, Paul (1989) Endogenous Technological Change, Journal of Political Economy, vol. 98, no. 5. Pt. 2, pp. S71-S102. Temple, Jonathan R. W. (2001). Growth effects of education and social capital in the OECD countries. OECD Economic Studies, 33, 57-101.

Economically Important Innovations: Product of Genius, Active and Risk-loving People (Forbes Dec 2002)