Thursday, March 24, 2011
The U-Turn p. 223-225
This section of the book continues with some of the problems Romer faced in completing his model. The first one mentioned is how Romer was to describe a variety of goods. We saw this in class the other day when we tried to simplify the Robinson Crusoe function; it's not easy getting down to the bare minimum. The problem Romer was finding was that his model basically came up with a monopolistic competition model (not what he wanted.) The solution was to change the model to a production function instead of a consumption function. Another problem with the model was "you couldn't just turn the mathematical crank" (p. 224) meaning that the math might not be 100% correct all the time. However, the model was good and it led to a better model that showed how specialization was the key to rising output.
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A for Basil.
ReplyDeleteActually, it's easy getting down to the bare minimum. It's hard to get those other parts of your mind that want to make the work harder to shut up for a while.
To clarify, what Dixit and Stiglitz had developed 10 years earlier was a model of why a consumer might want more than one kind of toothpaste. Romer turned this around to form a model of why producers might want to create one.
There's a huge point in this chapter. We're going to see that the Solow model says that population growth is a bad thing. But Romer's model, as the successor to Solow's, shows that the level of population is a good thing. This is the introduction to a confusing (but really enlightening) part of growth theory about this distinction between growth rate (differences) and levels effects.