Question

How does the Romer model of economic growth exploit the concept of nonrivalty?

Answer 1

Dear Student,

Below are the answer to your question

The key is that nonrivalry gives rise to increasing returns to scale. The “standard replication argument” is a fundamental justification for constant returns to scale in production. If we wish to double the production of computers from a factory, one way to do this is to build an equivalent factory across the street and populate it with equivalent workers, materials, and so on. That is, we replicate the factory exactly. This means that production with rival goods is, at least as a useful benchmark, a constant returns process.

What Romer stressed is that the nonrivalry of ideas is an integral part of this replication argument: firms do not need to reinvent the idea for a computer each time a new computer factory is built. Instead, the same idea (i.e., the detailed set of instructions for how to make a computer) can be used in the new factory, or indeed in any number of factories, because it is nonrival. Because there is constant returns to scale in the rival inputs (the factory, workers, and materials), there is therefore increasing returns to the rival inputs and ideas taken together: if you double the rival inputs and the quality or quantity of the ideas, then you will more than double total production.

Once you have increasing returns, growth follows naturally. Output per person then depends on the total stock of knowledge; the stock does not need to be divided up among all the people in the economy. Contrast this with capital in a Solow model. If you add one computer, you make one worker more productive. If you add a new idea – think of the computer code for the first spreadsheet, or a word processor, or even the Internet itself – you can make any number of workers more productive. With nonrivalry, growth in income per person is tied to growth in the total stock of ideas (i.e., an aggregate) not to growth in ideas per person.

If you like the answer, Kindly subscribe and up vote

$1590197147492_blob.png$

Thank You !!