lecture6-2[1]

8/13/2019 Lecture6-2[1]

1/24

TECHNOLOGICAL PROGRESS AND GROWTH

Lecture 6-2(Chapter 12 of textbook)

Capital accumulation cannot by itself sustain growth.

Sustained growth requires technological progress.

1 of 30

8/13/2019 Lecture6-2[1]

2/24

2 of 30

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 forgiven amounts of capital and labor.

12-1 Technological Progressand the Rate of Growth

Technological Progress and the Production Function

8/13/2019 Lecture6-2[1]

3/24

3 of 30

Lets denote the state of technology by A and rewritethe production function as:

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

A more restrictive but more convenient form is

Y F K AN ( , )

Output depends on both capital and labor ( K and N ),and on the state of technology ( A).AN is called effective labor.



8/13/2019 Lecture6-2[1]

4/24

8/13/2019 Lecture6-2[1]

5/24

Properties of the new production function

The properties are the same as in the previous chapter:

1. Constant returns to scale

2. Decreasing returns to each factor, capital andeffective labor

5 of 30

( , ) xY F xK xAN

8/13/2019 Lecture6-2[1]

6/24

6 of 30

The relation between output per effective worker andcapital per effective worker is:

Y K f

AN AN

In words: Output per effective worker is a functionof capital per effective worker.

, 1Y K

F

AN AN

which we can redefine as



8/13/2019 Lecture6-2[1]

7/247 of 30



Because of decreasingreturns to capital, increasesin capital per effectiveworker lead to smaller andsmaller increases in outputper effective worker.

Output per Effect iveWorker versus Capi talper Effect ive Worker

Figure 12 - 1

8/13/2019 Lecture6-2[1]

8/248 of 30

Under the assumptions in Chapter 11:

I S sY I

AN s

Y

AN


Interactions between Output and Capital

Y AN

f K

AN

I

AN

sf K

AN

8/13/2019 Lecture6-2[1]

9/24

Question: We need to ask what level of investment pereffective worker (I/AN) is needed to maintain a givenlevel of capital per effective worker.

Answer:In Ch.11, for K to be constant, investment (I) had to be

equal to the depreciation of the existing capital goods.

In Ch. 12, because we allow for technological progress, ANincreases over time too. Thus, to maintain the same ratioof K to effective worker (AN), requires an increase in Kproportional to the increase in AN.

9 of 30

8/13/2019 Lecture6-2[1]

10/2410 of 30

( ) g g K A N

( ) g g K

AN A N

The amount of investment per effective worker (I/AN)needed to maintain a constant level of capital per effectiveworker is:



gA-rate of technological progressgN-rate of population growthgAN=gA+gN (based on Proposition , Appendix 2)

The investment (I) per worker needed to maintain a constantlevel of capital per worker equals:

8/13/2019 Lecture6-2[1]

11/2411 of 30



Capital per effectiveworker and output pereffective worker convergeto constant values in thelong run.

Note : This figure focuseson output, capital, andinvestment per effectiveworker (divided by AN),rather than per worker(divided by N as it was in

Ch.11).

The Dynamics of Capi ta lper Effect ive Worker andOutput per Effec t iveWorker

Figure 12 - 2

8/13/2019 Lecture6-2[1]

12/2412 of 30

This is a description of the dynamics in the graph:

Because actual investment exceeds the investment levelrequired to maintain the existing level of capital per effectiveworker, K/AN increases.

Starting from ( K/AN )0, the economy moves to the right, withthe level of capital per effective worker increasing over time.

In the long run, capital per effective worker reaches a constantlevel (K*/AN), and so does output per effective worker (Y*/AN).

This implies that output ( Y ) is growing at the same rate aseffective labor ( A N ), so that the ratio of the two isconstant.


Dynamics of Capital and Output

8/13/2019 Lecture6-2[1]

13/2413 of 30

In steady state :Y grows at the same rate as AN AN grows at a rate ( g A+g N ) K also grows at a rate equal to ( g A+g N )

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

Because output , capital , and effective labor all grow atthe same rate, ( g A+g N ), the steady state of the economy is

also called a state of balanced growth .


Dynamics of Capital and Output

8/13/2019 Lecture6-2[1]

14/24

8/13/2019 Lecture6-2[1]

15/2415 of 30


The Effects of the Saving Rate

The increase in the savingrate leads to higher growthuntil the economy reachesits new, higher, balanced

growth path.

The Effects of anIncrease in the Savin gRate: II

Figure 12 - 4

8/13/2019 Lecture6-2[1]

16/2416 of 30

Technological progress in modern economies is the resultof firms research and development (R&D) activities.

Spending on R&D depends on:

The fertility of the research process, or how spendingon R&D translates into new ideas and new products,

and

The appropriability of research results, or the extent towhich firms benefit from the results of their own R&D.

12-2 The Determinants of TechnologicalProgress

8/13/2019 Lecture6-2[1]

17/2417 of 30

The determinants of fertility include:

The interaction between basic research (the search forgeneral principles and results) and applied research (theapplication of results to specific uses).

The country : some countries are more successful at basicresearch; others are more successful at applied researchand development.

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

12-2 The Determinants of TechnologicalProgress

The Fertility of the Research Process

8/13/2019 Lecture6-2[1]

18/24

8/13/2019 Lecture6-2[1]

19/2419 of 30

12-3 The Facts of Growth Revisited

Capital Accumulation versus Technological Progressin Rich Countries since 1950

Fast growth may come from two sources:

A higher rate of technological progress . If gA is higher,

balanced output growth ( gY=gA+gN ) will also be higher

Adjustment of capital per effective worker , K / AN , to ahigher level.

8/13/2019 Lecture6-2[1]

20/2420 of 30

Table 12-2 Average Annual Rates of Growth of Output per Capita andTechnological Progress in Four Rich Countries since 1950

Rate of Growth of Output per Worker (%)1950 to 2004

Rate of TechnologicalProgress (%) 1950 to 2004

France 3.2 3.1Japan 4.2 3.8

United Kingdom 2.4 2.6

United States 1.8 2.0

Average 2.9 2.9



8/13/2019 Lecture6-2[1]

21/2421 of 30

Table 12-2 illustrates two main facts:

First, growth since 1950 has been a result of rapidtechnological progress , not unusually high capitalaccumulation (growth rate of output has been roughly equal tothe rate of technological progress.

Second, convergence of output per worker across countrieshas come from higher technological progress, rather than fromfaster capital accumulation, in the countries that startedbehind (see ranking, with Japan at the top; do not forget thatJapan started behind).



8/13/2019 Lecture6-2[1]

22/2422 of 30

Going beyond growth in OECD countries, one of the strikingfacts in Chapter 10 was the high growth rates achieved by anumber of Asian countries.

Question : Do these high growth rates reflect fasttechnological progress, or do they reflect unusually highcapital accumulation?

Answer : I shall focus on China because of its size andbecause of the remarkable high output growth rate (nearly10%) it has achieved since the early 1980s.


Capital Accumulation versus TechnologicalProgress in China since 1980

8/13/2019 Lecture6-2[1]

23/2423 of 30


Capital Accumulation versus TechnologicalProgress in China since 1980

Table 12-3 Average Annual Rate of Growth of Output per Worker andTechnological Progress in China, 1983 to 2003

Rate of Growthof Output (%)

Rate of Growth ofOutput per Worker (%)

Rate of TechnologicalProgress (%)

9.7 8.0 8.2

The nature of technological progress is likely to be different in moreand less advanced economies. The more advanced economies,need to develop new ideas, new processes, and new products.

It is easier for the less advanced economies to imitate rather thaninnovate new technologies . This can explain why convergence,both within the OECD and in the case of China and other countries,typically takes the form of technological catch-up .

8/13/2019 Lecture6-2[1]

24/24

lecture6-2[1]

Documents