I believe I misunderstand the concept completely. Does Mr. Romer suggest in his New Growth Theory that economies will grow indefinitely? How is this theory established, did I miss something or is there no data to assist the argument? I really find the CFAI readings claim “New growth theory probably fits the facts of today’s word more closely …” difficult to believe given the collapse of many once sound growth assumptions. How would I identify which theory fits best? Will we be required to identify different growth theories from data or only from concept? Am I worrying too much?
Most likely from concepts, I could imagine a question saying evaluate a statement: New growth theory deals with the opportunity cost of woman’s time. - False Innovation is the primary driver of economic growth under new growth theory- True NGT simple states that so long as innovation is spurred via incentives/competition etc, economies will continue to grow. Although a higher IR might prompt these “inventors” to save rather than invest in their ideas…I think your reading to much into it.
This was tested last year IIRC. The data is all around you (well depending on where you live I suppose). The long term trends of liberal economies are pretty strong (and I mean liberal in the classic sense, not the American political sense). The wealth created in say the last hundred + years is pretty staggering. Look at the quality of consumer electronics, the increase in safety of cars and air travel, the power of a reasonably affordable home pc, improvements in healthcare manifested in large increases in average life span. Not to mention the fact that pretty much any American has access to every piece of information (and disinformation) in the world via the internet. It just goes on and on. As Northeastern points out, these are all driven by strong incentive structures for innovation, which of course require strong property rights, rule of law, etc. So long as incentives for innovation persist, so too will economic growth. As an aide, and I am not sure that this is part of any LOS, but definitely something that econ nerds can appreciate. One of the most interesting underpinnings of the theory is that knowledge capital is not subject to the law of diminishing returns. Think about it, adding more labor to a fixed amount of capital, or adding more capital to a fixed amount of labor both bring diminishing marginal product. However, increasing the stock of knowledge makes both labor and machines more productive!
Thanks I missed the bit about as long as incentives for innovation persist. That makes it more understandable. BTW. I definitely do not buy into the theory yet. Just take this “knowledge capital is not subject to the law of diminishing returns”. How exactly do you measure “knowledge capital”? How can you have any relationship with something you cannot reliably measure? Even if you can, say in terms of people supplying comments, to a given stock of capital, say a machine, the more people comment on the machine, the more likely that eventually no materially new comment emerges as more people comment.
MY personal opinion is measuring through the amount of graduates from higher educated institutes, it only has diminishing returns as we age hhaah