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

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

3. 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 (?)

4. How Human Capital Contributes to the Economic Growth?

5. 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.

6. 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.

7. 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.

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

9. 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

10. 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

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

12. 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

13. Endogenous Growth Model

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

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

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

18. 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

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

20. 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,
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:
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:
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,

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