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International Trade and Finance
Notes
8 LOVELY PROFESSIONAL UNIVERSITY
themes such as learning by doing [Arrow (1962)], the role of human capital [Uzawa (1965)], increasing
returns to scale [Kaldor (1961)] and even the idea of per capita growth sustained by increasing income
from the investment in capital goods, which include human capital, dating back to Knight (1944); as
well as the inspiration provided by countless authors which have already been mentioned, since
Adam Smith.
In accordance with this recent developments, we open the section with a brief and special reference
to Lucas’ second model (1988) and to the models of endogenous Research and Development (R&D)
devised by Romer (1990 and 1993), Grossman and Helpman (1990, 1991a and 1991b) and Aghion and
Howitt (1992). We conclude with the mention of several applications.
The Model of Lucas and the Models of Endogenous R&D
In the model of learning by doing and comparative advantage, of 1988, Lucas deals with the relation
between IT and EG. Essentially, he considered the function of aggregate production with two
consumption goods and only one production function, human capital, whose rate of accumulation
depended on the quantity of labour connected with production (thus expressing the learning effects).
He concluded that with IT each country would specialize in the good for which the autarky donation
of human capital presented a comparative advantage. And this specialization tended to be reinforced
because the learning took place in the specialized sector. Accordingly, if the rate of learning differed
from sector to sector, the rates of EG would be different from country to country.
In the endogenous EG models devised by Romer (1986) and Lucas (1988), the production function of
the economy resulted from the aggregation of the firms. Consequently, they turned out to be extremely
aggregate and incapable of correctly explaining the microeconomic foundations capable of justifying
the functioning of externalities and the agents’ investment decisions. A second generation of models
[Romer (1990 and 1993), Grossman and Helpman (1990, 1991a and 1991b) and Aghion and Howitt
(1992)] considered innovations to be the foundation of the EG process. The innovations were the
result of an explicit activity of R&D that occurred in the firms, with the result of R&D being the main
determinant of the EG rate.
Technological knowledge is by nature a good without rivalry of use (public good). The market system
can’t correctly guarantee its production without some public intervention in implementing a system of
patents. This system endows technology with the economic nature of a private good, in which the
exclusion of use is possible, and which therefore can be sold. An economic problem immediately arises.
By definition, the patent places the holder in a monopoly position, and by exploring that position he
gains a monopoly rent. On the other hand, the patent entails a fixed cost for the user because its price is
generally independent of use. A dilemma of economic policy also subsists in these models, in relation
to the diffusion of innovations.
Self-Assessment
1. Choose the correct options:
(i) International Trade on Economic Growth were first pointed out by
(a) Smith (b) Marshall
(c) Ramsey (d) none of these
(ii) Marginalism led to a new theory which was called
(a) New Classical (b) Modern theory
(c) Classical theory (d) none of these
(iii) The year of birth of the modern neoclassical theory of Economic Growth is
(a) 1959 (b) 1955
(c) 1956 (d) none of these
(iv) The endogenous economic growth models was devised by
(a) Smith (b) Romer and Lucas
(c) Englander and Gurney (d) none of these