Monday, March 28, 2011
Ch. 18 Pg. 242-245
Now, Lucas is going to explain how the influence of spillovers acts as a "function of the average level of skill". To begin, we know from everyday experiences that working in groups effects an individuals productivity. The accrual of human capital is based around "social activities" that do not result in the fabrication of a physical product. Lucas shows this in Solow's model by substituting "exogenous technology" or A(t), with H^y or the effect that we have on each others productivity (human capital spillovers). For example, assuming that human capital spillovers equals 0.4 means that the country's production is 40% greater than it would be without spillovers, such as: unions, company membership, universities, or any sort of team involvement. Lucas creates a second model using computers and potatoes to demonstrate how international trade is affected by the increasing returns suggested by human capital externalities. The second model uses the basic principle of comparative advantage, but does not provide a method to catch-up on Solow's model. Instead, the model proves the develop countries get the advantage of human capital spillovers, while the undeveloped countries lose their greatest human capital assets to richer countries. This model proves that countries that start with little human and physical capital will always be undeveloped. Lucas concludes that with no way to accurately measure the effects of human capital spillover, these economic influences will continue to be a mystery.
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C for Kim. Effects is a noun. You want the verb: affects. Plus, there's more mistakes that should have been caught by editing.
ReplyDeleteLucas is really reporting Romer's dissertation model. This is amazing. Lucas knows Romer, but isn't even his dissertation chair. Romer is almost unknown at this point. But Lucas knows how big a deal this is, and gives Romer full credit. Think about that: 3 years out of graduate school, and a future Nobel Prize winner is presenting your ideas at Cambridge.
But then Lucas stretches Romer a bit. At first glance, spillovers should improve growth rates: we're getting the productive secrets out earlier. But, at second glance, they may make the distribution of income worse: people who can use spillovers will move to where they are more common, and also people who may not be able to use them but can afford to move will do so as well. So areas that are dense with spillovers become richer, and bigger ... which will create more spillovers.
So Lucas has turned Romer's model into one that explains persistent and/or growing differences in income, as well as emmigration and brain drain.