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Suppose that two economies, Cicero and Berwyn, are described by the Romer model, they are identical...

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.

Will these two economies have different levels of per capita GDP?

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Answer #2

Since the stock of ideas is directly proportional to growth or GDP per capita keeping all else constant, the country with higher initial stock of ideas will have higher growth in GDP per capita based on Romer model assumptions. Such stock of ideas generates higher capital which leads to higher spending and thus consumption and aggregate demand get a boost leading to rise in GDP per capita.

Hence both economies shall have different growth rates in GDP per capita.

answered by: anonymous
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