Increasing Returns and New Developments in the Theory of Growth
Paul M. Romer
From the beginning, growth theory has been faced with technically challenging
questions about increasing returns and the way to capture ideas in a model of
market exchange. Initially, reliance on perfect competition forced growth
theory to narrow its scope. Recently, new tools for studying dynamic
equilibria with nonconvexities, externalities, and imperfect competition have
allowed growth theory to address broader questions like: Why have growth rates
tended to increase over time? Why is it that flows of capital are not
sufficient to equalize wages in different countries? How is it that trade
policy, or aggregate research and development expenditure, or the extent of
patent protection influences the rate of growth?
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