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Understanding the Romer Growth Model

The Romer Growth Model expands on the Solow Growth Model by including knowledge as a variable, allowing it to explain sustained long-term growth. It incorporates ideas, objects, and increasing returns to scale. Ideas accumulate unlike capital and provide a channel for sustained growth. The model has a balanced growth path where variables grow at a constant rate, unlike Solow which has no growth. It emphasizes the distinction between ideas and objects and incorporates increasing returns from nonrival ideas to truly understand growth causes.

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51 views2 pages

Understanding the Romer Growth Model

The Romer Growth Model expands on the Solow Growth Model by including knowledge as a variable, allowing it to explain sustained long-term growth. It incorporates ideas, objects, and increasing returns to scale. Ideas accumulate unlike capital and provide a channel for sustained growth. The model has a balanced growth path where variables grow at a constant rate, unlike Solow which has no growth. It emphasizes the distinction between ideas and objects and incorporates increasing returns from nonrival ideas to truly understand growth causes.

Uploaded by

person4115
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Professor Ruxandra Boul

The Romer Growth Model

As a subsequent development to the Solow Growth Model, the Romer Growth Model expands
macroeconomists’ ability to address one of the most important questions about an economy’s
growth experience; namely, how an economy can sustain growth over an extended period. This
ability comes from including in the model a variable that accounts for the role of knowledge,
both the level of existing knowledge and the development of new ideas. This variable allows the
model to explain sustained growth over long periods of time.

The Romer Growth Model incorporates three critical elements: objects, ideas, and increasing
returns to scale. It produces both output, which is either consumed or invested, and ideas. Ideas
accumulate in a way that capital does not, because they do not depreciate. They also provide a
channel for sustained growth in this model the Solow model does not have. In the simplest form
of the Romer model, inputs consists only of labor (objects) and ideas. It has no steady state in the
long-run but rather a balanced growth path that allows it to explain the persistent growth
observed in the world over time.

A balanced growth path exists when all the endogenous variables in the model grow at a
constant rate. In the Solow Model, there is no balanced growth path because in its steady state,
capital and labor do not grow ( gY  g K  0) . In the Romer model, however, the two endogenous
variables end up growing at the same constant rate (𝑔 = 𝑔 ) along a balanced growth path.

To truly understand the causes of sustained growth, we need a model that emphasizes the
distinction between ideas and objects; and because of the nonrivalry of ideas, this model must
incorporate increasing returns. We will omit capital completely to keep things simple. Instead of
assuming that growth occurs because of automatic and unmodeled (exogenous) improvements in
technology, the endogenous growth theory focuses on understanding economic forces underlying
technological progress.1

1
The specific theory we will develop in this exercise was constructed by Paul Romer in a series of papers,
including a 1990 paper titled “Endogenous Technical Change.”
1
1. Setting up the Model- Consider the economy represented by the Romer Growth Model:

2. Solving the Model- To solve this model, we need to express our four endogenous variables as
functions of the parameters of the model and of time.

a. Step 1: Solve for Labor. Substitute the allocation of labor into the resource constraint.

Lat It
Lyt I E I
b. Step 2: Find output per person using the resource constraint in the production function.

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E Atf [Link]
tIn
c. Step 3: Solve for the stock of knowledge (At) at each point in time

ZAt
That I
d. Step 4: Define a particular combination of parameters as a constant growth rate. Provide 5
an equation for the stock of knowledge.

At A 11 55 FIFTH
e. Step 5: Use At in equation for output per person.

YES yt [Link] tIct


2

long run idus in model


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