MEcon Master of Economics Master of Economics: Economic Growth 4

Question 1

What does Kaldor's stylized fact that 'the capital-output ratio is roughly constant over time' imply for growth models?

Accepted Answer

Output must grow at the same rate as the capital stock, which is characteristic of a balanced growth path

Answer

A stable capital-output ratio means K and Y grow proportionally, which is the definition of a balanced growth path—a key target for growth models to match the data.

Question 2

In the overlapping generations (OLG) model of growth, dynamic inefficiency occurs when:

Accepted Answer

The interest rate falls below the population growth rate, meaning the economy has over-accumulated capital

Answer

Dynamic inefficiency arises in OLG models when r < n: the economy is saving too much, and a pay-as-you-go social security system can make every generation better off by reducing over-accumulation.

Question 3

What is the 'broad capital' interpretation of the Solow model, and how does it address the model's empirical shortcomings?

Accepted Answer

It includes human capital alongside physical capital, raising capital's share and reducing the implied speed of convergence to match data

Answer

Mankiw, Romer, and Weil (1992) augmented the Solow model with human capital, which raises the effective capital share toward 2/3 and slows convergence speed, producing predictions more consistent with cross-country data.

Question 4

How do intellectual property rights (IPRs) affect innovation incentives in endogenous growth models?

Accepted Answer

Stronger IPRs increase the private return to innovation, encouraging R&D, but may also slow diffusion of existing knowledge

Answer

In Romer-style models, patent protection is necessary for innovators to recoup R&D costs, but excessive protection can slow growth by restricting access to existing ideas that are inputs into new innovation.

Question 5

What is the 'scale effect' in first-generation endogenous growth models, and why has it been criticized?

Accepted Answer

A larger population or research workforce raises the long-run growth rate, contradicting evidence that growth rates haven't risen with rising R&D inputs

Answer

Models like Romer (1990) predict that more researchers means faster growth, implying accelerating growth over time as populations rise—but empirically, growth rates have been roughly stable despite large increases in R&D employment.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Master of Economics: Economic Growth 4