Technological Progress and Growth

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TechnologicalProgress andGrowth
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Technological Progressand the Rate of Growth

• Technological progress has many dimensions. It
  may mean
• Larger quantities of output
• Better products
• New products
• A larger variety of products
• Technological progress leads to increases in
  output for given amounts of capital and labor.

3
Technological Progressand the Production Function

• Lets denote the state of technology by A and
  rewrite the production function as

• A more restrictive but more convenient form is

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

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Technological Progressand the Production Function

• Technological progress reduces the number of
  workers needed to achieve a given amount of
  output.
• Technological progress increases AN, which we can
  define as the amount of effective labor in the
  economy.
• With constant returns to scale,

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Technological Progressand the Production Function

• As in the previous framework, the relation
  between output per effective worker and capital
  per effective worker is

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Technological Progressand the Production Function

• Output per Effective Worker Versus Capital per
  Effective Worker

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Assumptions

• We now relax the two assumptions we used before
  (in Chapter 11)
• The number of workers (the population) is growing
  at a constant (exogenous) rate.
• Technology is improving at a constant (exogenous)
  rate.

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Interactions BetweenOutput and Capital In a
Steady State

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

As before, in the steady state, this expression
will equal investment (per effective worker)
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Interactions BetweenOutput and Capital

• Dynamics of Capital per Worker and Output per
  Effective Worker

10
Dynamics of Capital and Output

• In the steady state
• Output per effective worker is constant.
• Output per worker grows at a rate (gA).
• Output growth equals (gAgN).
• The growth rate of output in the steady state is
  independent of the saving rate.
• Capital and effective labor also grows at a rate
  equal to (gAgN).
• Because output, capital, and effective labor all
  grow at the same rate, (gAgN), the steady state
  of the economy is also called a state of balanced
  growth.

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Dynamics of Capital and Output
The Characteristics of the Steady State The Characteristics of the Steady State The Characteristics of the Steady State The Characteristics of the Steady State The Characteristics of the Steady State
Rate of growth of Chap. 12 Chap. 11 Chap. 11
1 Capital per effective worker 0 0
2 Output per effective worker 0 0
3 Capital per worker gA gA 0
4 Output per worker gA gA 0
5 Labor gN gN 0
6 Capital gA gN gA gN 0
7 Output gA gN gA gN 0
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The Determinants of Technological Progress

• Technological progress in modern economies is the
  result of research and development (RD)
  activities.
• Private spending on RD depends on
• The fertility of the research process, or how
  spending on RD translates into new ideas and new
  products, and
• The appropriability of research results, or the
  extent to which firms benefit from the results of
  their own RD.

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The Fertility of Research

• The determinants of fertility include
• The interaction between basic research and
  applied research.
• The institutional environment education levels,
  firms characteristics, legal frameworks, etc.
• Time It might take many years for the full
  potential of major discoveries to be realized.

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The Appropriability of Research Results

• If firms cannot appropriate the profits from the
  development of new products, they will not engage
  in RD.
• Factors at work include
• The nature of the research process. Is there a
  payoff in being first?
• Legal protection. Patents give a firm that has
  discovered a new product the right to exclude
  anyone else from the production or use of the new
  product for a period of time.

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Capital Accumulation Versus Technological Progress
Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress Average Annual Rates of Growth of Output per Capita and of Technological Progress
Growth of Output per Capita Growth of Output per Capita Growth of Output per Capita Rate of Technological Progress Rate of Technological Progress Rate of Technological Progress
1950-73(1) 1973-87(2) Change(3) 1950-73(4) 1973-87(5) Change(6)
France 4.0 1.8 ?2.2 4.9 2.3 ?2.6
Germany 4.9 2.1 ?2.8 5.6 1.9 ?3.7
Japan 8.0 3.1 ?4.9 6.4 1.7 ?4.7
United Kingdom 2.5 1.8 ?0.7 2.3 1.7 ?0.6
United States 2.2 1.6 ?0.6 2.6 0.6 ?2.0
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Capital Accumulation Versus Technological Progress

• The table illustrates three main facts
• The earlier period of high growth of output per
  capita was due to rapid technological progress.
• The slowdown in growth of output per capita since
  1973 has come from a decrease in the rate of
  technological progress.
• Convergence of output per capita across the rich
  countries has come from higher technological
  progress rather than from faster capital
  accumulation.

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Why Did Technological ProgressSlow Down in the
mid-1970s?
Spending on RD as a Percentage of GDP Spending on RD as a Percentage of GDP Spending on RD as a Percentage of GDP Spending on RD as a Percentage of GDP
1963 1975 1989
France 1.6 1.8 2.3
Germany 1.4 2.2 2.9
Japan 1.5 2.0 3.0
United Kingdom 2.3 2.0 2.3
United States 2.7 2.3 2.8
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TFP Growth
19
Science Education
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Epilogue

• We still cannot explain well enough why some
  countries grow more than others.
• There seem to be many different reasons for the
  vastly different growth performances across
  countries (and to a lesser extent across time).