Question

1. Romer (1990) divided economic goods into objects and ideas.
   1. How are ideas and objects different?
   2. Why is the distinction important for economic growth?
   3. Can you explain it in terms of conventional microeconomic theory?
   4. Can you think of two examples of ideas important in economic activity other than the ones we have discussed in class?

Answer 1

a. According to Romer, the world is split into two factions: The physical objects and ideas, wherein the ideas play a very crucial role in driving economic growth. The diffrence between these two is pretty simple. Objects are anything and everything around us, including the most basic sub atomic particles to the huge manufacturing plants, with a very valid assumption that these objects are scarce in nature and are subjected to the law of diminishing returns. But on the other hand, ideas are limitless, and humans' capability to brainstorm ideas have driven exponential growth in the past. For instance, the invention of mobile phones itself has brought about an intense technological growth. Therefore, ideas drive the economic growth.

b. Romer has established that the surge in these ideas can in fact turn the law of diminishing returns into pieces. To add on to the benefits, these ideas promote increasing returns. In simple words, if you can utilize the objects with an idea driven schematic to promote growth. An example for this could be to automate chemical plant to increase the overall productivity. This on the longer run reduces the costs incurred to a company.

c. As per conventional economic theory, the above two sections have very well shown us how ideas can drive economic growth and reduce the costs to a firm.

d. I don't exactly know what were the examples discussed in the class, so I'm not in a position to answer this question.