Answer to Question #317768 in Macroeconomics for Ajey

Question

Prove that in the Romer model, the long run growth rate of the economy is determined by

the parameters of the production function for ideas and the rate of growth for researchers

which is ultimately given by the population growth rate. (Romer Model)

Answer 1

In his theoretical view, the accumulation of knowledge is at the heart of long-term economic growth, and ideas, being non-rival, drive growth in the market. Therefore, Romer's analysis demonstrates how new ideas can drive sustainable, long-term economic growth. Similarly, a central proposition of New Growth theory is that, unlike land and capital, knowledge is not subject to diminishing returns.