A Romer economy starts off with an initial stock of ideas equal to 100. The growth rate of ideas is 5% and the share of the population engaged in research is 5%. What is the growth rate of output per capita? Round to the nearest decimal

5%

Explanation:

Output per capita grows at a constant rate.

Therefore, we can calculate the level of income per capita in any two periods and find the corresponding growth rate. For example,

y1 = 100x(1 - 0.05)x(1 +0.05) = 99.8 and

y2 = 100x(1 - 0.05)x(1 + 0.05)2 = 104.7.

The growth rate of per capita output in period 2 is then (104.7-99.8)/99.8=5%.

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