12 C H A P T E R Prepared by: Fernando Quijano and Yvonn Quijano And Modified by Gabriel Martinez...

1212C H A P T E RC H A P T E R

Prepared by:

Fernando Quijano and Yvonn Quijano

And Modified by Gabriel Martinez

TechnologicalTechnologicalProgress andProgress andGrowthGrowth

© 2003 Prentice Hall Business Publishing Macroeconomics, 3/e Olivier Blanchard

Technological Progress and GrowthTechnological Progress and Growth

The model in this chapter is identical to the The model in this chapter is identical to the model in chapter 11 except for two details:model in chapter 11 except for two details:

Technology (and population) grow over Technology (and population) grow over time.time.

Everything is measured in terms of Everything is measured in terms of effectiveeffective worker.worker.– Kind of “worker plus way of doing things.”Kind of “worker plus way of doing things.”


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Technological ProgressTechnological Progressand the Rate of Growthand the Rate of Growth

Technological progress has many Technological progress has many dimensions. It may mean:dimensions. It may mean:

– Larger quantities of outputLarger quantities of output– Better productsBetter products– New productsNew products– A larger variety of productsA larger variety of products

Technological progress leads to Technological progress leads to increases in output for given amounts of increases in output for given amounts of capital and labor.capital and labor.

12-1


Technological ProgressTechnological Progressand the Production Functionand the Production Function



Let’s denote the state of technology by Let’s denote the state of technology by AA and rewrite the production function asand rewrite the production function as

Y F K N A ( , , )(+ + + )

A more restrictive but more convenient form isA more restrictive but more convenient form is

Y F K A N ( , )

Output depends on both capital and labor, and Output depends on both capital and labor, and on the state of technology.on the state of technology.



A higher A meansA higher A means– technological progress reduces the number of technological progress reduces the number of

workers needed to achieve a given amount of workers needed to achieve a given amount of output.output.

– technological progress increases technological progress increases ANAN, which we , which we can think of as the amount of can think of as the amount of effective laboreffective labor, or , or labor in “efficiency units.” in the economy.labor in “efficiency units.” in the economy.

With constant returns to scale,With constant returns to scale,2 2 2Y F K A N ( , )

More generally,More generally,xY F xK xA N ( , )



The relation between output The relation between output per effective per effective workerworker and capital per effective worker is: and capital per effective worker is:

Y

A Nf

K

A N

In words, output per effective worker is a function of In words, output per effective worker is a function of capital per effective worker.capital per effective worker.

Y

A NF

K

A N

,1

which we can redefine aswhich we can redefine as



Output per Effective Output per Effective Worker Versus Capital Worker Versus Capital per Effective Workerper Effective Worker

Because of decreasing returns to capital, increases in capital per effective worker lead to smaller and smaller increases in output per effective worker.


Interactions BetweenInteractions BetweenOutput and CapitalOutput and Capital

The dynamics of output and capital per The dynamics of output and capital per worker involve three relations:worker involve three relations:1.1. The relation between capital per effective The relation between capital per effective

worker and output per effective worker.worker and output per effective worker.Y

A Nf

K

A N

Production



2.2. The relation between capital per effective The relation between capital per effective worker and investment per effective worker.worker and investment per effective worker.

I S sY

I

A Ns

Y

A N

Dividing both sides by Dividing both sides by ANAN, we get, we get

Y

A Nf

K

A N

Given thatGiven that I

A Nsf

K

A N

thenthen

Investment



3.3. The relation between depreciation per effective The relation between depreciation per effective worker and capital per effective worker.worker and capital per effective worker.

If population rises (at rate If population rises (at rate ggNN), the amount of ), the amount of

capital per effective workercapital per effective worker will fall. will fall.

If technology improves (higher A) at rate If technology improves (higher A) at rate ggAA, K/AN , K/AN

falls.falls.

If capital depreciates (at rate If capital depreciates (at rate ), K/AN falls.), K/AN falls.

Then, what is the investment per effective worker Then, what is the investment per effective worker needed to maintain a constant level of capital needed to maintain a constant level of capital per effective worker?per effective worker?



3.3. The relation between depreciation per workerThe relation between depreciation per worker—equivalently, the investment per worker —equivalently, the investment per worker needed to maintain a constant level of capital needed to maintain a constant level of capital per worker—and capital per worker.per worker—and capital per worker.

( ) g g KA Nor equivalentlyor equivalently

( ) g gK

A NA N

The amount of investment per effective worker needed to The amount of investment per effective worker needed to maintain a constant level of capital per effective worker ismaintain a constant level of capital per effective worker is

KggK NA )(

Required Investment



Dynamics of Capital Dynamics of Capital per Worker and per Worker and Output per Effective Output per Effective WorkerWorker

Capital per effective worker and output per effective worker converge to constant values in the long run.


Dynamics of Capital and OutputDynamics of Capital and Output At (At (KK//ANAN))00, actual , actual

investment exceeds investment exceeds the investment level the investment level required to maintain required to maintain the existing level of the existing level of capital per effective capital per effective worker, worker, KK//ANAN increases.increases.

In the long run, or in In the long run, or in the steady state of the the steady state of the economy, capital per economy, capital per effective worker and effective worker and output per effective output per effective worker are constant worker are constant and equal to (and equal to (K/ANK/AN)* )* and (and (YY//ANAN)*.)*.


Dynamics of Capital and OutputDynamics of Capital and Output

Note that in the Note that in the steady state, steady state, Y/AN and K/AN Y/AN and K/AN are constant, but are constant, but A and N are A and N are growing.growing.

How fast do Y How fast do Y and K grow?and K grow?



In steady state, output (In steady state, output (YY) grows at the same ) grows at the same rate as effective labor (rate as effective labor (ANAN); effective labor ); effective labor grows at a rate (grows at a rate (ggAA++ggNN); therefore, output ); therefore, output growth in steady state equals (growth in steady state equals (ggAA++ggNN). Capital ). Capital also grows at a rate equal to (also grows at a rate equal to (ggAA++ggNN).).

The growth rate of output is independent of the The growth rate of output is independent of the saving rate.saving rate.

Because output, capital, and effective labor all Because output, capital, and effective labor all grow at the same rate, (grow at the same rate, (ggAA++ggNN), the steady ), the steady state of the economy is also called a state of state of the economy is also called a state of balanced growthbalanced growth..



Table 12-1 The Characteristics of Balanced GrowthRate of growth of:

11 Capital per effective workerCapital per effective worker 00

22 Output per effective workerOutput per effective worker 00

33 Capital per workerCapital per worker ggAA

44 Output per workerOutput per worker ggAA

55 LaborLabor ggNN

66 CapitalCapital ggAA + + ggNN

77 OutputOutput ggAA + + ggNN


The Effects of the Saving RateThe Effects of the Saving Rate

The Effects of an The Effects of an Increase in the Saving Increase in the Saving Rate: IRate: I

An increase in the saving rate leads to an increase in the steady-state levels of output per effective worker and capital per effective worker.


The Effects of the Saving RateThe Effects of the Saving Rate

The Effects of an The Effects of an Increase in the Saving Increase in the Saving Rate: IIRate: II

The increase in the saving rate leads to higher output growth until the economy reaches its new, higher, balanced growth path.

Notice that between steady states Y and K grow faster than gN + gA.


The Determinants of The Determinants of Technological ProgressTechnological Progress

Technological progress in modern economies is Technological progress in modern economies is the result of firms’ the result of firms’ research and development research and development (R&D)(R&D) activities. The outcome of R&D is activities. The outcome of R&D is fundamentally fundamentally IDEASIDEAS..

– For example, a reorganization of production or a For example, a reorganization of production or a longer-lasting windshield wiper.longer-lasting windshield wiper.

Spending on R&D depends on:Spending on R&D depends on:– The The fertilityfertility of the research process, or how of the research process, or how

spending on R&D translates into new ideas and spending on R&D translates into new ideas and new products, andnew products, and

– The The appropriabilityappropriability of research results, or the of research results, or the extent to which firms benefit from the results of their extent to which firms benefit from the results of their own R&D.own R&D.

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The Fertility of the Research The Fertility of the Research ProcessProcess

The determinants of fertility include:The determinants of fertility include:– The interaction between basic research (the The interaction between basic research (the

search for general principles and results) and search for general principles and results) and applied research (the application of results to applied research (the application of results to specific uses).specific uses).

– The country: some countries are more The country: some countries are more successful at basic research; others are more successful at basic research; others are more successful at applied research and successful at applied research and development. A culture of entrepreneurship.development. A culture of entrepreneurship.

– Time: It takes many years, and often many Time: It takes many years, and often many decades, for the full potential of major decades, for the full potential of major discoveries to be realized.discoveries to be realized.


The AppropriabilityThe Appropriabilityof Research Resultsof Research Results

Firms invest in technology if they expect to Firms invest in technology if they expect to be profitable.be profitable.– R&D costs are considerable and the benefits R&D costs are considerable and the benefits

are often uncertain and far into the future.are often uncertain and far into the future. They only receive the profits if they are able They only receive the profits if they are able

to “appropriate” the technology, that is, to to “appropriate” the technology, that is, to receive most of the benefits from its receive most of the benefits from its invention.invention.

If firms cannot appropriate the profits from If firms cannot appropriate the profits from the development of new products, they will the development of new products, they will not engage in R&D.not engage in R&D.


The AppropriabilityThe Appropriabilityof Research Resultsof Research Results

Factors at work in appropriability include:Factors at work in appropriability include:– The nature of the research process. Is there a The nature of the research process. Is there a

payoff in being first at developing a new payoff in being first at developing a new product?product? Maybe discovering A will lead to the immediate Maybe discovering A will lead to the immediate

discovery of a better technology B.discovery of a better technology B.

– Legal protection. Legal protection. PatentsPatents give a firm that has give a firm that has discovered a new product the right to exclude discovered a new product the right to exclude anyone else from the production or use of the anyone else from the production or use of the new product for a period of time.new product for a period of time. Patents: basic research versus applied research.Patents: basic research versus applied research.


The Facts ofThe Facts ofGrowth RevisitedGrowth Revisited

Capital Accumulation Versus Technological Capital Accumulation Versus Technological ProgressProgress

Fast growth may come from two sources:Fast growth may come from two sources:– A higher rate of technological progress. If A higher rate of technological progress. If ggAA is is

higher, balanced output growth (higher, balanced output growth (ggYY=g=gAA+g+gNN) will also ) will also

be higher. In this case, the rate of output growth be higher. In this case, the rate of output growth equals the rate of technological progress.equals the rate of technological progress.

– Adjustment of capital per effective worker, Adjustment of capital per effective worker, KK//ANAN, to , to a higher level. In this case, the growth rate of a higher level. In this case, the growth rate of output exceeds the rate of technological progress.output exceeds the rate of technological progress.

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Capital Accumulation Versus Capital Accumulation Versus Technological ProgressTechnological Progress

1.1. The period of high growth of output per capita, The period of high growth of output per capita, from 1950 to 1973, was due to rapid from 1950 to 1973, was due to rapid technological progress, not to unusually high technological progress, not to unusually high capital accumulation.capital accumulation.

2.2. The slowdown in growth of output per capita The slowdown in growth of output per capita since 1973 has come from a decrease in the since 1973 has come from a decrease in the rate of technological growth, not from rate of technological growth, not from unusually low capital accumulation.unusually low capital accumulation.

3.3. Convergence of output per capita across Convergence of output per capita across countries has come from higher technological countries has come from higher technological progress rather than from faster capital progress rather than from faster capital accumulation.accumulation.


Why Did Technological ProgressWhy Did Technological ProgressSlow Down in the mid-1970s?Slow Down in the mid-1970s?

Why did technological growth slow down?Why did technological growth slow down?– Measurement error?Measurement error?– Growth of the service sector, where Growth of the service sector, where

technological growth is slow?technological growth is slow?– Not enough spending on R&D?Not enough spending on R&D?– ““Infertile” new technologies?Infertile” new technologies?

Compare that with the IT revolution.Compare that with the IT revolution.


Epilogue: TheEpilogue: TheSecrets of GrowthSecrets of Growth

Differences in output per worker between Differences in output per worker between rich and poor countries are mostly rich and poor countries are mostly attributed to differences in the measured attributed to differences in the measured level of technology across countries.level of technology across countries.

For various reasons, poor countries are For various reasons, poor countries are unable to close this unable to close this technology gaptechnology gap..

Some reasons include political instability, Some reasons include political instability, poorly established property rights, lack of poorly established property rights, lack of entrepreneurs, and poorly developed entrepreneurs, and poorly developed financial markets.financial markets.

12-4


Epilogue: The Secrets of GrowthEpilogue: The Secrets of Growth

The poor countries that have grown rapidly in the The poor countries that have grown rapidly in the last 20 years have experienced a rapid last 20 years have experienced a rapid accumulation of both physical and human capital.accumulation of both physical and human capital.

Some of those countries have relied on the Some of those countries have relied on the importance of foreign trade, free markets, and importance of foreign trade, free markets, and limited government intervention, while others have limited government intervention, while others have relied on government intervention and relied on government intervention and industrial industrial policypolicy—a policy aimed at helping specific sectors —a policy aimed at helping specific sectors of the economy.of the economy.

12 C H A P T E R Prepared by: Fernando Quijano and Yvonn Quijano And Modified by Gabriel Martinez...

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