Economic Growth: Lecture 2

In this lecture we’re going to go over some of the foundational theories of en-dogenous technological growth. These came around in earnest starting in the early nineties with Romer (1990) and Aghion and Howitt (1992), as well as Grossman and Helpman (1991), which provides an interesting synthesis of the two. A little later on Jones (1995) provides an insightful critique to this strand of literature, in addition to a bit of perspective. 1 Aggregate Framework How might we begin to think about technological growth in an economy? In the simplest representation, we can imagine there is an aggregate production for ideas and that this concept of ideas maps directly into what we’ve been discussing as total factor productivity (A). The rate of change of the stock ideas is then a function of the current stock of ideas and the amount of effort put into producing new ideas through, for example through research. We’ll think of this in terms of labor, but you could also imagine capital playing an important role. Thus we have A ̇ = G(A,R) for some function G. This representation is a bit abstract, so we’ll assume a fairly flexible functional form A ̇ = GAφRη 1 This captures the notion that as the state of knowledge advances, coming up with new and useful ideas becomes harder. Given this specification, the growth rate of ideas, which should have a strong bearing on the overall growth rate of the economy, is then gA