University of California, Santa Cruz - ECON 100B

CHAPTER 6: Growth and Ideas

MULTIPLE CHOICE

1)In Romer’s influential paper he divided the economic world into:

1. 1. resources and ideas.                               d. utilities and objects.
   2. objects and resources.                            e.   None of these answers is correct.
   3. objects and ideas.

2. Which of the following is an example of an idea?
   1. new irrigation techniques                       d. the steam engine
   2. turning sand into computer chips           e.   All of these answers are correct.
   3. the assembly line

3. Which of the following flowcharts best summarizes Romer’s description of ideas and growth?
   1. Ideas ? Nonrivalry ? Increasing returns ? Imperfect competition
   2. Ideas ? Capital ? Constant returns ? Imperfect competition
   3. Capital ? Rivalry ? Increasing returns ? Perfect competition
   4. Ideas ? Rivalry ? Increasing returns ? Perfect competition
   5. Capital ? Nonrivalry ? Decreasing returns ? Imperfect competition

4. According to the text, there are approximately        different coherent paragraphs written with 100 words or less in the English language.

a.   1020,000                                                 d. 10430

b.   20,000                                                     e.   4 ? 10⁷⁷

c.                               10³³⁰

5. The amount of raw material in the universe—the amount of sand, oil, and the number of atoms of carbon, oxygen, and so on—is         The number of ways of arranging and using these raw

materials is             .

1. 1. finite; also finite                                      d. virtually infinite; zero
   2. infinite; virtually infinite                         e.   zero; infinite
   3. finite; virtually infinite

6. In economics, a rival good is one that:
   1. cannot be consumed by more than two people at a time.
   2. can be consumed by more than one person at a time.
   3. is congested if used by more than one person at a time.

1. 4. cannot be consumed by more than one person at a time.
   5. None of these answers is correct.

7. In economics, a nonrival good is one that:
   1. cannot be consumed by more than one person at a time.
   2. can be consumed by more than one person at a time.
   3. can be consumed by more than one person at a time but is congested.
   4. cannot be consumed by more than two people at a time.
   5. None of these answers is correct.

8. Which of the following is a nonrival good?
   1. a peanut butter sandwich                       d. All of these answers are correct.
   2. orange juice                                            e.   None of these answers is correct.
   3. a jacket

9. Which of the following is a nonrival good?
   1. a TV signal                                              d. a dam
   2. a blueprint                                              e.   All of these answers are correct.
   3. national defense

10. If there are large fixed or research and development costs, such as in the pharmaceutical industry, production can be characterized by:
    1. negative costs.                                        d. large variable costs.
    2. constant returns to scale.                       e.   increasing returns to scale.
    3. decreasing returns to scale.

11. 

    If Y is a good’s output, X is spending to produce a good,       is the fixed cost associated with production, and C is the average cost of production, which of the following production functions exhibits increasing returns?

    1. 

       

       d.
    2. e.

c.                                

12. Increasing returns to scale is characterized by:
    1. constantly declining fixed costs.
    2. diseconomies of scale; that is, the average cost falls as output rises.
    3. economies of scale; that is, the average cost rises as output rises.

1. 4. diseconomies of scale; that is, the average cost is constant as output rises.
   5. economies of scale; that is, the average cost falls as output rises.

13. 

    To get increasing returns to scale using the production function              , we need to replace total factor productivity with:
    1. more capital.                                          d. the number 2.

    2. 

       the flow of ideas, At.                               e.   twice the factor productivity,    .
    3. the stock of ideas, A_t.

14. 

    With the production function                    , if we double              , we have an increasing returns production.
    1. capital                                                     d. capital, labor, and the stock of ideas
    2. capital and the stock of ideas                 e.   labor and the stock of ideas
    3. capital and labor

15. 

    With the production function                    , if we double              , we have a constant returns production.
    1. capital                                                     d. capital and labor
    2. capital, labor, and the stock of ideas     e.   labor and the stock of ideas
    3. capital and the stock of ideas

16. 

    The production function                     , where A_t is the stock of ideas, K_t is capital, and L_t is labor, assumes:
    1. A_t is rivalrous.                                         d. L_t is rivalrous.
    2. A_t is nonrivalrous.                                   e.   A_t is fixed.
    3. K_t is nonrivalrous.

17. The difference between total factor productivity (TFP) in the Solow model and the stock of ideas in the Romer model is that:
    1. TFP grows and ideas are fixed.               d. TFP is rivalrous and ideas are not.
    2. TFP is fixed and ideas can grow.             e.   There is no difference.
    3. TFP is nonrivalrous and ideas are not.

18. If there are large fixed costs due to research and development, perfect competition does not generate new ideas because:
    1. firms need to recoup these costs through higher profits.
    2. with monopolistic competition, prices are equal to the marginal cost.
    3. with monopolistic competition, prices are equal to the marginal cost minus a markup.
    4. perfectly competitive firms always set prices lower than the marginal cost.
    5. the government does not adequately fund innovation.

19. Because in many industries the cost of generating new ideas is so high, firms must charge a price

                cost.

1. 1. equal to the marginal                             d. equal to the average fixed
   2. higher than the marginal                       e.   lower than the average fixed
   3. lower than the marginal

20. In perfect competition, the price is          ; in a monopoly, the price is           .
    1. zero; positive
    2. greater than the marginal cost; equal to the marginal cost
    3. less than the marginal cost; greater than the marginal cost
    4. equal to the marginal cost; greater than the marginal cost
    5. positive; zero

21. Because of fixed R&D costs,              are needed to generate          .
    1. profits; capital                                         d. variable costs; total factor productivity
    2. costs; capital                                           e.   profits; total factor productivity
    3. profits; new ideas

22. The reason perfect competition cannot generate new ideas is that:
    1. profits are positive.
    2. perfectly competitive firms have no ideas.
    3. profits are zero.
    4. firms are too small to generate ideas.
    5. revenues are positive.

23. Which of the following can be used to give firms incentive to innovate?
    1. patents                                                    d. lower taxes
    2. copyrights                                               e.   All of these answers are correct.
    3. trade secrets

24. Which of the following can be used to give firms incentive to innovate?
    1. patents                                                    d. subsidies
    2. copyrights                                               e.   All of these answers are correct.
    3. prizes

25. The president of Tunisia asks you to suggest an idea to improve the economy’s growth without worrying about decreasing returns. You suggest:
    1. paying a competitive wage.
    2. offering firms an incentive to produce new ideas.
    3. placing a higher tax on firms.
    4. removing legal protection for firms.
    5. None of these answers is correct.

26. An allocation that is              exists if there is no way to change a resource allocation that makes someone worse off when allocating more to another.
    1. Hotelling competitive                             d. Kuhn-Tucker conditional
    2. Fama efficient                                         e.   Arrow impossible
    3. Pareto optimal

27. An example of open source software is:
    1. Linux.                                                       d. Red Hat.
    2. Mountain Lion.                                        e.   Hummingbird.
    3. Win32.

28. What might be an explanation for the production of open source, free software?
    1. marginal cost at zero                              d. moral hazard
    2. increasing returns                                   e.   altruism
    3. diminishing marginal utility

29. In 1994, the               passed the              to               .
    1. World Trade Organization; Trade-Related Aspects of Intellectual Property Rights; protect intellectual property rights
    2. Bretton Woods System; General Agreement on Tariffs and Trade; promote free trade
    3. United Nations; United Nations Conference on Trade and Development; reduce trade barriers
    4. United States; Toxic Asset Relief Program; improve banking procedures
    5. Generalized Agreement on Tariffs and Trade; U.S. Agency for International Development; improve research potential in developing countries

30. In the Romer model, what are the two key outputs produced?
    1. a government good and new ideas
    2. a consumption good and new ideas
    3. a consumption good and total factor productivity
    4. a consumption good and capital
    5. None of these answers is correct.

31. In the Romer model, the inputs to production are:
    1. capital and labor.                                    d.   natural resources, labor, and ideas.
    2. capital and ideas.                                    e.   labor and total factor productivity.
    3. labor and ideas.

32. 

    In the Romer model, the production function          , where A_t is knowledge and L_yt is the amount of labor in the output sector, exhibits:
    1. constant returns to labor and increasing returns to labor and knowledge.
    2. constant returns to labor and increasing returns to knowledge.
    3. increasing returns to labor and constant returns to labor and knowledge.
    4. decreasing returns to labor and constant returns to labor and knowledge.
    5. increasing returns to labor and increasing returns to labor and knowledge.

33. 

    In the knowledge production function                       represents:
    1. natural resources.
    2. the cost of producing new ideas.
    3. the marginal cost of labor.
    4. how good an economy is at generating knowledge.
    5. labor’s wage.

34. In the Romer model,             is the resource constraint.

    1. 

       

       and                                                d.  

       

b.

c.                                

35. In the Romer model, the more labor you dedicate to generating ideas, the   but               .
    1. faster you accumulate knowledge; at a loss to current output in the consumption sector
    2. faster you accumulate knowledge; at a gain to current output in the consumption sector
    3. slower you accumulate knowledge; at a loss to current output in the consumption sector
    4. less you accumulate knowledge; at a gain to current output in the consumption sector

1. 5. more knowledge you lose; at a gain to current output in the consumption sector

36. 

    The production function in the Romer model is given by        , where   is the growth rate of

               .

1. 1. 

      

      ; capital                                  d.                                   ; knowledge

b. 

c.                               

37. In the Romer model, output is increasing in the         and decreasing in the            .
    1. saving rate; depreciation rate
    2. research share; growth rate of knowledge
    3. growth rate of knowledge; fraction of population in the ideas sector
    4. growth rate of knowledge; depreciation rate
    5. saving rate; growth rate of knowledge

38. In the Romer model, if an economy allocates all of its labor to production, it will:
    1. reduce output.
    2. reduce the number of ideas it generates.
    3. increase the number of ideas it generates.
    4. not generate any ideas.
    5. None of these answers is correct.

39. The production of new ideas in the Romer model is:
    1. increasing in the efficiency of creating knowledge and the fraction of labor in research and development.
    2. decreasing in the efficiency of creating knowledge and increasing the fraction of labor in research and development.
    3. increasing in the efficiency of creating knowledge and decreasing in the fraction of labor in research and development.
    4. increasing in the population growth rate and capital accumulation.
    5. decreasing in the efficiency of creating knowledge and in the fraction of labor in research and development.

40. 

    In the Romer model, the growth rate of ideas,         , is increasing in the:
    1. share of the population doing research and the total population.
    2. knowledge efficiency parameter and the population growth rate.
    3. knowledge efficiency parameter, the research share, and the total population.

1. 4. knowledge efficiency parameter and the saving rate.
   5. share of population engaged in research and development and the saving rate.

41. In the Romer model, the growth rate of knowledge is given by:

    1. 

       

       d.

.                                                                          .

1. 2. 

      

      e.

.                                                                    .

.

42. In the Romer model, if Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter but Canada’s population is larger, then:
    1. Taiwan has a higher per capita output growth rate.
    2. Canada has a higher per capita output growth rate.
    3. each country’s per capita output grows at the same rate.
    4. Canada has higher per capita income than Taiwan.
    5. Canada’s level of income is greater than Taiwan’s.

43. 

    

    

    Suppose the parameters of the Romer model take the following values:   ,

and                 What is the growth rate of this country’s economy?

1. 1. 10 percent                                               d. 50 percent
   2. 40 percent                                               e.   0.10 percent
   3. 0.02 percent

44. 

    

    

    Suppose the parameters of the Romer model take the following values:

and                   What is the growth rate of this country’s economy?

1. 1. 2 percent                                                 d. 10 percent
   2. 20 percent                                               e.   0.01 percent
   3. 0.2 percent

45. 

    

    

    Suppose the parameters of the Romer model take the following values: and       What is the number of researchers in this country?

a.   20                                                            d. 0.10

b.   1 million                                                 e.   200

c.                                100

46. 

    Suppose the parameters of the Romer model take the following values:

period, y₁?

1. 1. about 1.19                                               d. about 14.3
   2. about 11.9                                               e.   about 9.9
   3. about 12.0

47. 

    

    

    Suppose the parameters of the Romer model take the following values:

and                   What is the per capita income of this country in the 10th

period, y₁₀?

1. 1. about 6.13                                               d.   about 11.9
   2. about 61.3                                               e.   about 10.9
   3. about 12.0

48. 

    

    

    Suppose the parameters of the Romer model take the following values:

and                   What is the per capita income of this country in the initial

period, y₀?

1. 1. about 12.1                                               d. about 1.19
   2. about 11.9                                               e.   about 9.9
   3. about 12.0

49. If the economies of East and West Timor are identical in every way except that East Timor has fewer researchers:
    1. West and East Timor will grow at the same rate.
    2. East Timor should grow faster, according to the Romer model.
    3. West Timor should grow faster, according to the Solow model.
    4. West Timor should grow faster, according to the Romer model.
    5. East Timor is smaller than West Timor.

50. 

    

    

    

    

    

    Suppose the Romer model parameters in East Timor are                                    and while in North Timor they are                                                        and                  then:
    1. neither country grows.
    2. East Timor’s per capita income growth rate is 20 percent and North Timor’s is 2 percent.
    3. East Timor’s per capita income growth rate is 5 percent and North Timor’s is 0.05 percent.

1. 4. East Timor’s per capita income growth rate is 100 percent and North Timor’s is 1 percent.
   5. each country’s per capita income growth rate is 20 percent.

51. Nonrivalry in the knowledge sector means that:
    1. per capita income depends on the total population.
    2. per capita income depends on some of the stock of ideas.
    3. per capita income depends on the total stock of ideas.
    4. labor in the ideas sector also can be used in the output sector.
    5. all labor is used in the ideas sector.

52. In the Romer model,             is the driving force behind sustained           economic growth.
    1. labor; long-term                                     d. capital; short-term
    2. knowledge; short-term                           e.   capital; long-term
    3. knowledge; long-term

53. Idea accumulation in the Romer model exhibits:
    1. increasing returns to capital.
    2. diminishing returns in the stock of ideas.
    3. negative returns in the stock of ideas.
    4. no diminishing returns in the stock of ideas.
    5. diminishing returns to labor.

54. Because there are no diminishing returns in the stock of ideas in the Romer model:
    1. old ideas continue to contribute to current economic growth.
    2. economic growth cannot be sustained forever.
    3. the economy eventually reaches a steady state.
    4. economic growth eventually slows.
    5. new ideas must be continually created.

55. The Romer model might be made more realistic by considering:
    1. that there is a fixed labor productivity measure for all countries.
    2. the global population instead of a single country’s population.
    3. that researchers are heterogeneous.
    4. the global stock of ideas.
    5. productivity as being infinite.

56. In the Romer model, the Mexican economy:
    1. never generates new ideas.

1. 2. can use ideas devised in the United States.
   3. cannot use ideas devised in the United States.
   4. eventually will reach a steady state.
   5. does not have an ideas sector.

57. Nonrivalry in the Romer model means that ideas created can:
    1. benefit only similar economies.
    2. benefit only a few economies across the world.
    3. be used only in the economy that devised them.
    4. benefit virtually all economies across the world.
    5. None of these answers is correct.

58. A balanced growth path is defined as a situation in which the:
    1. output growth rate is zero.
    2. growth rates of all endogenous variables are variable.
    3. growth rates of some of the endogenous variables are constant.
    4. growth rates of all endogenous variables are constant.
    5. All of these answers are correct.

59. The parameter(s) in the Romer model is/are the:
    1. initial stock of ideas, the population, the fraction of population in the ideas sector, and the ideas efficiency parameter.
    2. ideas efficiency parameter.
    3. fraction of population in the ideas sector and the ideas efficiency parameter.
    4. initial capital stock and the fraction of population in the ideas sector.
    5. initial capital stock and the ideas efficiency parameter.

60. The reason that economic growth in Luxembourg is greater than the growth rate in the United States is:
    1. that Luxembourg has more researchers.
    2. the globalization of ideas.
    3. that it has a higher level of capital stock.
    4. that there are more resources in the United States and diminishing returns to natural resources.
    5. that the capital depreciation rate is higher in the United States.

Figure 6.1: Romer Model: Per Capita Output

61. In the Romer model in Figure 6.1, at time t₀, a change in the growth rate of per capita output can be explained by a(n):
    1. decrease in the ideas efficiency parameter.
    2. increase in the population.
    3. increase in the share of labor engaged in research.
    4. increase in the saving rate.
    5. decrease in the population.

62. In the Romer model in Figure 6.2, at time t₀, a change in the shape of the production function can be explained by an increase in the:
    1. population.
    2. share of labor engaged in research.
    3. ideas efficiency parameter.
    4. saving rate.
    5. growth rate.

63. In the Romer model, if an economy’s population increases:
    1. output growth decelerates.
    2. output immediately increases and output growth slows.
    3. output immediately decreases and output growth slows.
    4. output immediately decreases and output growth accelerates.

1. 5. output growth accelerates.

64. In the Romer model, if an economy’s share of researchers decreases, there will be:
    1. an immediate decrease in output and output growth will slow.
    2. an immediate increase in output and output growth will slow.
    3. an immediate increase in output and output growth will accelerate.
    4. an immediate decrease in output and output growth will accelerate.
    5. no change in output but output growth will slow.

65. 

    In the ideas sector production function,                  , there are:
    1. increasing returns to the ideas stock but decreasing returns overall.
    2. decreasing returns to the ideas stock but increasing returns overall.
    3. decreasing returns to the ideas stock and labor.
    4. increasing returns to the ideas stock and labor.
    5. None of these answers is correct.

66. Even if there are decreasing returns to the ideas stock in the knowledge sector, the Romer model:
    1. cannot explain sustained growth.
    2. can explain an economy that reaches its steady state.
    3. can explain sustained growth.
    4. cannot explain why economies’ saving rates differ.
    5. cannot explain why the output sector exhibits decreasing returns.

67. In the Romer model, with decreasing returns to the knowledge sector:
    1. the transition dynamics appear very similar to those in the Solow model.
    2. an increase in the research share decreases the growth rate in the short run.
    3. an increase in the research share increases the growth rate in the short and long runs.
    4. a decrease in the research share increases the growth rate in the short run.
    5. There are no level effects.

68. In the Romer model, with decreasing returns to the knowledge sector:
    1. the number of researchers is irrelevant to long-term per capita income.
    2. more researchers produce more ideas, raising the long-run growth rate of per capita income.
    3. more researchers produce fewer ideas, raising the long-run growth rate of per capita income.
    4. more researchers produce more ideas, raising the long-run level of per capita income.
    5. more researchers cause the knowledge stock to contract.

69. According to the Case Study on Globalization and Ideas in the text, in        there are about

                for every phone landline in the region.

1. 1. sub-Saharan Africa; 10 cell phones        d. Latin America; two cars
   2. Southeast Asia; 0.5 computers                e.   eastern Europe; three modems
   3. the Indian subcontinent; five pagers

70. In the combined Solow-Romer model, long-run growth is sustained because of:
    1. population growth.                                 d. total factor productivity.
    2. capital accumulation.                             e.   no capital depreciation.
    3. the nonrivalry of ideas.

71. According to the combined Solow-Romer model, all countries grow at:
    1. the same rate in the long run, but actual growth rates can differ across countries for long periods of time.
    2. the same rate in the medium and long runs.
    3. different rates forever.
    4. the same rate as the United States in each period.
    5. different rates in the long run, but actual growth rates are the same across countries for long periods of time.

72. In the combined Solow-Romer model, the growth rate of total output, using the standard production function, is given as:

    1. 

       

       .                                                    d.                               .

    2. 

       

       .                      e.                                        .

    3. 

       .

73. 

    In the combined Solow-Romer model, the growth rate of total output, using the production function

, is given as:

1. 1. 

      

      .                                          d.                               .

   2. 

      

      .                                                   e.                                           .

   3. 

      .

74. Labor composition is used in “growth accounting” because it:
    1. includes total number of hours worked.
    2. can include changes in the age distribution of the labor force.

1. 3. can include the educational attainment in the labor force.
   4. includes the total number of workers.
   5. All of these answers are correct.

75. “Growth accounting” endeavors to:
    1. measure GDP.
    2. measure economic growth rates.
    3. determine how capital accumulates.
    4. measure what factors—and in what proportions—affect overall economic growth.
    5. measure global output and the proportion of global output attributed to each country.

76. 

    In the growth accounting equation,                                                         , B represents             , while C is called                        .
    1. labor composition; capital accumulation
    2. the contribution from capital; the (Solow) residual
    3. labor composition; the (Solow) residual
    4. educational attainment; labor composition
    5. None of these answers is correct.

77. In the growth accounting equation,                                                     , A represents             , while B is called                       .
    1. labor composition; capital accumulation
    2. the contribution from capital; the (Solow) residual
    3. the contribution from capital; labor composition
    4. educational attainment; labor composition
    5. per capita capital contribution; labor composition

78. In growth accounting, the residual, g_A, is so named because:
    1. the economy is complicated.
    2. economists know exactly what contributes to growth.
    3. it is a way to measure observed TFP growth.
    4. it is a way to measure unobserved TFP growth.
    5. it measures labor composition.

79. For the years 1995–2007, if output per person in the private sector grew 2.7 percent, capital intensity grew 1.1 percent, and labor composition grew 0.2 percent, what was the growth rate of total factor productivity?

80. For the years 2011–2015, if output per person in the private sector grew 1.9 percent, capital intensity grew 1.1 percent, and total factor productivity grew 0.2 percent, what was the growth rate of labor composition?
    1. 0.6 percent                                              d.   1.2 percent
    2. 2.6 percent                                              e.   1.3 percent
    3. 3.4 percent

81. For the years 1948–1973, output per person in the private sector grew 3.3 percent, labor composition grew 0.2 percent, and total factor productivity grew 2.2 percent. What was the growth rate of capital intensity?

Refer to the following table when answering the following questions.

Table 6.1: Growth Accounting

82. 

    Consider the growth accounting data in Table 8.1. If the production function is given by

, the growth rate of per capita GDP for 1948–2011 is        percent. a.      ?1.7                                                         d. 2.6

b.   2.1                                                           e.   1.8

c.                                3.3

83. 

    Consider the growth accounting data in Table 8.1. If the production function is given by

, the growth rate of per capita GDP for 1948–1973 is        percent. a.      ?1.7                                                         d. 0.0

b.   0.8                                                           e.   2.6

c.                                1.1

84. 

    Consider the growth accounting data in table 8.1. If the production function is given by

, the growth rate of per capita GDP for 1995–2007 is         percent.

85. 

    Consider the growth accounting data in table 8.1. If the production function is given by

, the fastest growth rate of per capita GDP occurred during which period? a.                                                       1948–1973         d. 2007–2011

b.   1973–1995                                              e.   Not enough information is given.

c.                               1995–2007

86. In growth accounting, if we subtract the capital intensity growth rate and the labor composition growth rate from the growth rate of output per person, we have:
    1. the growth rate of total factor productivity.
    2. the Markov residual.
    3. capital accumulation.
    4. savings.
    5. education.

87. In the combined Solow-Romer model, an exogenous increase in the saving rate:
    1. immediately increases the growth rate of per capita output, which eventually slows to its previous rate.
    2. immediately decreases the per capita output, but the growth rate does not change.
    3. increases the growth rate of per capita income, but eventually the economy reaches a new steady-state level of per capita output.
    4. immediately decreases the growth rate of per capita output, which eventually accelerates to a higher rate.
    5. has no impact on the growth rate or level of per capita output.

88. In the combined Solow-Romer model, an exogenous increase in the saving rate:
    1. pushes the economy to a lower per capita output balanced growth path.
    2. pushes the economy to a higher per capita output balanced growth path.
    3. pushes the economy’s growth rate of per capita output to infinity.
    4. pushes the economy to a new steady-state level of per capita output.
    5. has no impact on the growth rate or level of per capita output.

89. In the combined Solow-Romer model, the total output growth rate:
    1. equals the growth rate of ideas.

1. 2. is greater than the growth rate of ideas.
   3. is lower than the growth rate of ideas.
   4. equals the rate of capital depreciation.
   5. is greater than the population growth rate.

90. In the combined Solow-Romer model, the total output growth rate is greater than in the Romer model because:
    1. the saving rate is higher.                        d. of capital accumulation.
    2. of population growth.                             e.   of a greater research share.
    3. capital depreciation is zero.

TRUE/FALSE

1. New irrigation techniques are examples of ideas.

2. The signals of the TV show Dexter are a rival good.

3. The “idea” of the assembly line leads to increasing returns.

4. The number of ideas is finite.

5. 

   The production function                    , where A_t is the stock of ideas, K_t is capital, and L_t is labor, assumes that A_t is rivalrous.

6. There is no difference between the stock of ideas and total factor productivity.

7. In a monopolistically competitive market equilibrium, the price is equal to the marginal cost.

8. Offering inventors a prize is a way of providing an incentive to generate new ideas.

9. In the Romer model, the more labor you dedicate to generating ideas, the slower you accumulate knowledge, but at a loss to current output in the consumption sector.

10. 

    In the Romer model, the growth rate of knowledge is       .

11. Suppose Chile and Côted’Ivoire have the same fraction of researchers and the same knowledge efficiency parameter, but Chile’s population is larger. Chile has a higher per capita output growth rate.

12. In the Romer model, the creation of capital is the driving force behind sustained long-term economic growth.

NOT: In the Romer model, the generating of ideas sustains long-term economic growth.

13. The Romer model relies on increasing returns to ideas and labor.

14. In the Romer model, if the population increases exogenously, the growth of knowledge stays constant.

15. According to the combined Solow-Romer model, all countries grow at the same rate in the medium and long runs.

NOT: All countries grow at the same rate in the long run, but actual growth rates can differ across countries for significant periods of time.

16. 

    In the combined Solow-Romer model, the growth rate of total output, using the standard production function, is given as                       .

17. 

    In the growth accounting equation for the standard Cobb-Douglas production function,

.

18. In growth accounting, if we subtract the capital intensity growth rate and the labor composition growth rate from the growth rate of output per person, we have the growth rate of total factor productivity.

19. 

    In the growth accounting equation                                                                           represents the

growth rate of labor composition.

20. In the combined Solow-Romer model, an exogenous increase in the saving rate has no effect on the growth rate or level of per capita output.

21. In the combined Solow-Romer model, the steady-state level of output is positively related to the saving and depreciation rates.

SHORT ANSWER

1. How does the Romer model of economic growth exploit the concept of nonrivalry?

2. 

   Consider the production function                    , where Y is output and X represents inputs. Graph this production function. Does it display decreasing, constant, or increasing returns to scale?

3. Consider the following Romer model of economic growth:

1. 1. 

      

      If                                              and               , what is the growth rate of knowledge in this economy?
   2. What is the growth rate of per capita output in this economy?
   3. Using the information from year 1, what is the level of per capita output in this economy in year 5?

4. 

   Consider the Romer model. If the percentage of the population engaged in ideas formation, , decreases, what are the short- and long-term impacts of this shift?

5. 
   Consider the following data:

China    India      United States     Japan     Germany    Russia

Total R&D/

6. Consider the table below, which shows the number of researchers in R&D (per million) in 2010 and the average growth rate of real GDP for the years 1985–2014. Explain how the Romer model explains the relationship between the number of researchers and economic growth. Given your answer, does the data below corroborate your story? How might you explain any inconsistencies between the data and the model?

GDP Growth      6.9%       1.0%           5.7%                  2.4%         

(Source: Penn World Tables 9.0 and the World Bank)

7. 

   Consider the Cobb-Douglas production function                  .
   1. Write this in growth-rate terms.
   2. Next, define this in terms of per capita growth and identify the contributions of the components of per capita growth.
   3. If the growth rate of capital per worker is 1.3 percent, the labor composition growth rate is

8. Consider the data in the following table:
   1. Fill in the missing values, assuming the capital share is equal to ? = 1/4.
   2. Which period had the greatest per capita growth? The slowest?
   3. Which period has the slowest TFP growth, and what might have contributed to this?

9. 

   You have been asked to calculate TFP growth for four countries from 1985–2014: China, Hungary, South Korea, and Mexico. You decide to reach for the Solow growth model to do your calculations,

specifically, the Cobb-Douglas production function:                   . Using the data available in the table below, which shows the average labor share and growth rates of real GDP per capita, labor composition, and capital per capita from 1985–2014, find the TFP growth rate for each country. Given what you know about each country, what may explain your results?

(Source: Penn World Tables 9.0) ANS:

. Plugging in the numbers we get:

Table 6.3