Paul Romer's theory of economic growth differs from traditional theories in that
A) Romer argues that investment in capital goods is not important in encouraging growth while investment in human capital is, whereas traditional theorists emphasize both human and physical capital.
B) Romer argues that investment in human capital always occurs before investment in physical capital, while traditional theories emphasize the priority of physical capital.
C) Romer argues an investment-knowledge cycle can exist, but requires constant increases in investment rates, while traditional theories argue that investment rates can be constant.
D) Romer argues an investment-knowledge cycle allows a one-time increase in investment to permanently increase a country's growth rate, while traditional theory argued such an investment would have only a short-term effect.

Question

Quizplus · Accepted Answer

Romer's theory, known as endogenous growth theory, posits that technological innovation and ideas, which can be fostered through investment in human capital and research and development, can lead to sustained economic growth. This contrasts with traditional, or neoclassical, growth theories that often see technological progress as an external factor and suggest diminishing returns to capital, implying that a one-time increase in investment would not have a permanent effect on growth rates. Romer's emphasis on the role of ideas and knowledge in perpetuating growth without diminishing returns marks a significant departure from these traditional views.

Paul Romer's Theory of Economic Growth Differs from Traditional Theories