Question

Suppose that two economies, Cicero and Berwyn, are described by the Romer model, they are identical in every way except that the initial stock of ideas in Cicero is larger than the initial stock of ideas in Berwyn.

If Berwyn increased the share of the labor force that is engaged in the production of new ideas, will Cicero and Berwyn still have a different growth rate of per capita GDP and levels of GDP?

Answer 1

According to Romer model, GDP of a country is impacted by the objects (objects here stand for capital and labor) and ideas of the country.

At the initial stage, since Berwyn has lower initial stock of ideas compared to that of Cicero, the level of GDP of Berwyn would be low.

But with increase in labor force engaged in production of new ideas in Berwyn, the level of GDP will not increase all of a sudden and will not reach at the same level as that of Cicero. The reason for this is that Cicero might have reached at very high level of GDP compared to that of Berwyn because of having higher initial stock of ideas. So it might become tough for Berwyn to reach the same level of GDP as that of Cicero for quite some years.

The GDP level will only become the same if Cicero has no new ideas of growth and Berwyn keeps on increasing with new ideas. Otherwise it is not possible for the two to get together on same level.