Romer Endogenous Growth Model

• Learning by investment¹
• Inspired from Learning by Doing

\[ Y = A(R) \times f(R_{i},K_{i},L_{i}) \]

where, - \(A(R)\) is economy wide, technology developed with \(R\) - \(R\) is the economy wide RND - \(R_{i}\) is the RND of individual firm

There are three components: 1. Externalities: \(+\)ve spillover effects 2. Increasing returns to production of output 3. Decreasing returns to production of new knowledge

The new knowledge after a certain point, will face DMR because it now doesn't increase the output as much as it did initially. But even though new knowledge may have DR, output will still \(\uparrow\).²

Due to weak patents, though they have DR to new knowledge. The knowledge has spillover to benefit the entire economy.³

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1. Knowledge keeps growing and it is sustained by investment. ↩

2. In research sector predominantly. But in Goods sector, output will be much higher than the amount of knowledge used. ↩

3. Since the knowledge has no barrier to contain it, everyone can use that knowledge and anchor on it to create better output, that benefits the economy. Piracy example. ↩