Question

In: Economics

What happens to output per worker in the short term and long term if the amount...

What happens to output per worker in the short term and long term if the amount of labor increases (L upwards arrow) in the basic Romer model ? (Your answer should compare the output to what it would have been on its prior trajectory.) Briefly explain the economic intuition.

Solutions

Expert Solution

Romer model explain the increase in the long run growth of output per worker with respect to the technological progress. The technical change will determine the demand for labour in the market. Paul Romer emphasis that the firms are following monopolistically competitive market system and this will help to attain a monopoly power within the firms and cooperation among the industry. This market system will help to develop new technologies within the firms which will exclude from others usage.
According to Romer the increase in labour supply will increase the level of existing knowledge and increase the growth rate. Initial stock of ideas, research and productivity were depends on the level of working population. The increase in labour in both short run and long run will increase the output per worker through high level of research and introduction of new technologies in the production sector. Romer explain that the steady state growth rate of output per worker will equates the steady state growth rate of technology.


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