Do you think technological progress is an important factor for the economic growth of a country? Well, definitely yes. But do you consider it as an external factor or an internal factor?
Well, most of the economists considered it as an external factor. But the Roma model? It's...
incorporated it as an internal part of the economic ecosystem. Hello, my name is Rini Khalra Balan and welcome back to my YouTube channel 5-Minute Economics where I teach economic concepts in a span of just 5 minutes. The topic for today as you can see is the Romance model of energy.
endogenous growth which is one interesting model and in this video i'll be covering all you need to know about the indigenous growth theory romer's model the assumptions diagrams basically all that you need to know about this particular topic so yeah let's get started also guys don't forget to like this video and do subscribe to my channel in case you haven't already and also follow me on my instagram handle which is also known as five minutes economics so let me introduce what actually is endogenous growth theory so endogenous basically means economic growth is due to due to factors which are internal to the economy and not the external ones. Well, there are exogenous growth theories also in economics and you can always remember exogenous and external both are same and endogenous means which are factors which are internal right your XX external and exogenous internal and endogenous. So those factors which are internal and they say that improvement in innovation, knowledge, human capital, these are the things they focused on led to the improved productivity positively affecting the economy.
So these factors are internal part, this is the internal part, not the third party or outside. So external factors, if you want to know in detail about externalities, I have made up a video on Coase theorem and Arrows impossibility theorem and attached the links. You can actually go and watch out Coase theorem, I have explained what are externalities. It is coming from third party, it is external.
Here we are talking about internal factors. Why was this theory made? Well because there was dissatisfaction with the exogenous theory, that's why this theory came up later.
And this gave due... due importance to technological advancement and said as I said in the beginning of the video that technological advancements are a part of you know the progress not they are not external they are internal and here they say now see this economic growth kaise ho hai ja productivity badhti hai productivity kaise badhti hai ja technological changes hota hai you know like type pehle khud type karte hai har cheez now everything is very fast right because of computerization technology aai aur vo kaise aai kyunki innovation kisi nae innovated the computer, human capital means increased their knowledge, invested in education, skills, knowledge. So these are the three factors.
So basically, economic growth is due to these reasons. So we should focus a lot on these three things. Well, moving forward to the assumptions in the endogenous growth theory, now call it assumptions or you know things which government should give to supplement the growth.
So we'll study them. So number one, government should provide incentives and subsidies for businesses in private sector. If government is going to provide them some subsidies or some incentives, you know, then private sector has the money to actually invest in R&D, do some research, get some innovation, invest in human capital, you know. So if someone hadn't done R&D, you know, like maybe...
some years back we would all be stuck to those small phones we had like our parents had now we have such high quality phones we don't need cameras now because now you know phones have such good inbuilt cameras so kisi smart bandhe ne R&D kiya tha right so that's why we should invest more in R&D to bring in this advancement there are increasing returns to scale human capital brings in into education basically I want to say it uh I've written in short it means that when you invest in education you it is an increasing returns to scale that is it is a win-win situation basically up or in future just a BF we see even our you know people who are not that educated themselves or don't have that much money but they want their children to study why because they know a beyond been risked career long-term which I can they will get jobs and it will you know enhance the whole family's growth so definitely education spend can eyes up women situation government should help entrepreneurs through their policies that we recently I'm gonna budget Nikhil a budget to anybody force so it's maybe saw that how you know government has removed the angel tax for startups which is definitely a good thing tax khatta hai toh unke paas paisa zyada bache ga and they can invest more in R&D and innovation infrastructure and manufacturing should also be focused because you know if we have a good infrastructure then better people you know more people can actually be incorporated in that and better working environment studying environment better skill enhancement hogai and of course government should give them intellectual property tax patents copyrights to anyone who is bringing in anything innovative So moving ahead to Roma's model. So what actually Roma focused on in his model was He said changes to technology are an intergenius factor or internal factor. If there is a change in a firm, it is an internal change, not an external one. There are internal changes in our firm because changes in technology are the result of intentional actions which have been taken by some firms or an individual has taken it. They have invested in human capital and R&D and that has brought in technological change which definitely brings in productivity, growth in productivity and you know growth in the economy overall but change care for change internal head Naki external head here they say once knowledge is created can be used by many other forms simultaneously obviously there's someone who did that research someone For example, chat GPT, Microsoft found this and now chat GPT is such a great tool.
And similarly, so many AI tools have come. But you know, it's not like people have forgotten chat GPT or something like that. It has given benefit that other tools are also there. That idea was there, that innovation came in and then rest people followed. So new ideas of course lead to technological advancement.
Now that new idea has led to even further technological advancement. And further an economy is growing. So that is what moment for. focused on.
He said if more knowledge is accumulated it is more benefited. It is not like if someone else uses it then knowledge will deplete. In fact if more people use it then it will increase. Quickly running through some assumptions of this model. Well production of new knowledge definitely depends on the existing stock of knowledge and the number of researchers.
The more researchers there will be the more innovation there will be. So that is dependable. Overall on the labor, the capital as well as the existing knowledge.
Do we even have that much labor to produce more knowledge? So definitely. And lastly, labor is divided into two classes.
One is for production of goods, and the other is for production of knowledge. a small graph let me show how population affects this Romer's model this graph where we've seen we've taken x-axis per year and y-axis we've taken the output per person after increasing L which is labor so what it shows basically guys when population grows now this is nothing which we have to actually remember it is very common cheese key just a low burden a population but a key researchers you know Zaba Dengi and it's such as burning it they don't it's a document oh it's a definitely population can growth is a good thing for this particular model Let's say C, without population growth there was a steady growth. You can see this red line and this green dotted line. This was steady growth on the upward slope.
You can see there is no change, it's growing with years time. But with population growth, now as population grows, that knowledge accumulates and there is a steeper upward slope. You can see this red slope guys, how it goes upward with population growth. So this is what basically population, how it affects this particular model. Romer says that population definitely enhances this model.
He says that economy has to grow so you have to focus on knowledge and innovation, something which I have been telling many times above and previously also. and focus on the related policies. If you want sustainable economic growth, what is sustainable economic growth?
What is long term future economic growth and not what exogenous models give sometimes short lived growth. If you want futuristic, then implement this model and continuously you should invest in knowledge, in innovation and then only an economy can grow. Lastly, Government plays an important role because it can focus more on education.
It can open schools, colleges, provide free education, provide education at a minimal cost, support for R&D, provide subsidies, incentives, remove taxes. tax holiday, tax relief, angel tax has been removed, even Bihar has been given a budget for development of the state through hospitals, education, colleges etc. and encouraged knowledge. So this is basically how government can focus on this growth.
Basically to grow, if we want this, then government has to focus on this. Well, lastly, coming to the limitations of indigenous growth theory, people say that it is not an accurate theory because there is no empirical evidence to prove it. Secondly, there is the difference between physical capital and human capital has not been given very distinctively. physically capital means machines and human capital means knowledge and lastly they say they have also disregarded the role of organizations, places they ignored a lot of things and focused on human capital so this was something which was criticized in this particular theory but that's all from my end guys from this particular topic and I hope this video was useful for you please do let me know in the comment section below and I'll see in the next video pretty soon