Answer to Question #317767 in Macroeconomics for Raam

Question

The Production of new goods, or new ideas, requires the possibility of earning profits and

therefore necessitates a move away from perfect competition. Explain this in the context of

Romer model

Answer 1

A company that aspires to produce new goods into the market, must consider three factors which include externalities, increasing returns in the production of output and diminishing returns in the production of new knowledge. More research must be conducted in order to come up with a new product that is totally different from those of other competitors. This will assist the company to have a competitive advantage over the others. According to Romer, it is spillovers from research efforts by a firm that leads to the creation of new knowledge by other firms.