Romer's Theory Of Human Capital

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In a later paper, Romer (1990) further described the research process and the nature of knowledge, as a good, and distinguished it from other capital and consumer goods. The paper also emphasized on the importance of human capital and states that human capital rather than population is the correct measure of scale. In this paper Romer describes technological change as the improvement in the instructions for mixing together raw materials to form new goods and designs. The paper is based on three premises. The first premise is that technological progress drives long run economic growth and provides incentive for continued capital accumulation. Second, technological change arises due to the international actions taken by people who respond market…show more content…
Human capital is measured as the cumulative effect of activities such as formal education and on the job training. To keep the analysis simple Romer (1990) holds labor and human capital fixed in supply. The model treats human capital, H, as the rival component of knowledge and it treats technology, A, as the non rival component. A is a count of number of designs. The economy has 3 sectors. The first is a research sector that uses human capital and the existing knowledge to produce new knowledge or new designs. The second is an intermediate goods sector that uses designs from the research sector, along with forgone output, to produce a number of producer durables. These producer durables are available for use in the production of final goods at any time. The third is the final goods sector that uses labor, human capital and the producer durables form the intermediate goods sector to produce output to final…show more content…
Human capital can be either allocated to Output, H_Y, or it can be allocated to the creation on new knowledge, H_A. The growth rate of technology in the model is dependent on the allocation of human capital to new knowledge and the existing stock of knowledge. To be specific, A ̇=δH_A A. A crucial assumption here is that anyone engaged in research has free access to the entire stock of knowledge. Furthermore, the equation implies that the larger the stock of knowledge the more productive the researcher working on new designs. In the intermediate goods sector, a firm must purchase a certain design to commence production of a producer durable. Once it owns the required designs the firm can convert a certain unit of final output into one unit of producer durable. The author treats this sector as a black box that takes in final output in and gives out capital goods. He assumes imperfect competition for the market of producer durables. Romer assumes that forgone consumption is never manufactured, instead the resources that would have been used to produce the forgone output are used to produce capital goods. A new design or idea in this model translates into produced output in two different ways. Firstly, it enables the production of a new good that can be used to produce output. Secondly, a design also increases the total stock of knowledge and thereby increases the productivity of human capital allocated to

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