Economics 302 Sec 001 Intermediate Macroeconomic Theory and Policy Spring 2011 4 27 2011 Instructor Prof Menzie Chinn UW Madison 12 1 Technological Progress and the Rate of Growth Technological Progress and the Production Function Technological progress has many dimensions It may mean Larger quantities of output Better products New products A llarger variety i t off products d t Technological progress leads to increases in output for given amounts t off capital it l and d labor l b 2 of 30 12 1 Technological Progress and the Rate of Growth Technological Progress and the Production Function Let s denote the state of technology by A and rewrite the production d i ffunction i 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 labor efficiency units 3 of 30 12 1 Technological Progress and the Rate of Growth T h l i l Progress Technological P and d the h P Production d i FFunction i The relation between output per effective worker and capital per effective worker is Y K F AN AN 1 which we can redefine as Y K f AN AN In words Output per effective worker is a function of capital per effective worker worker 4 of 30 12 1 Technological Progress and the Rate of Growth T h l i l Progress Technological P and d the h P Production d i FFunction i Figure 12 1 Output per Effective Worker versus Capital per 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 5 of 30 12 1 Technological Progress and the Rate of Growth I Interactions i b between O Output and dC Capital i l The dynamics of output and capital per worker involve The relation between output per worker and capital per worker I S sY Di idi b Dividing both h sides id by b AN AN we get I Y s AN AN Given that 6 of 30 Y K f AN AN then I K sf AN AN 12 1 Technological Progress and the Rate of Growth I Interactions i b between O Output and dC Capital i l The dynamics of output and capital per worker involve The relation between depreciation per worker equivalently the investment per worker needed to maintain a constant level of capital per worker and capital cap ta per pe worker o e K g A g N K or equivalently g A g N K The amount of investment per effective worker needed to maintain a constant level of capital per effective worker is K g A g N AN 7 of 30 12 1 Technological Progress and the Rate of Growth I Interactions i b between O Output and dC Capital i l This figure focuses on output capital and investment per effective worker worker rather than per worker Output per effective worker increases with capital per effective worker but at a decreasing rate The relation between i investment per effective ff i worker and capital per effective worker is drawn as the upper curve multiplied l i li d b by the h saving i rate s Tech progress is A increasing 8 of 30 12 1 Technological Progress and the Rate of Growth D Dynamics i off Capital C i l and dO Output In steady state output Y grows at the same rate as effective labor AN effective labor grows at a rate gA gN therefore output growth in steady state equals gA gN Capital per effective worker also grows at a rate equal to gA gN The growth rate of output is independent of the saving rate Because output capital and effective labor all grow at the same rate gA gN the steady state of the economy is also called a state of balanced growth 9 of 30 12 1 Technological Progress and the Rate of Growth Th Effects The Eff off the h Saving S i Rate R Figure 12 3 The Effects of an Increase in the Saving Rate 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 10 of 30 12 1 Technological Progress and the Rate of Growth Th Effects The Eff off the h Saving S i Rate R Figure 12 4 The Effects of an Increase in the Saving Rate II The increase in the saving rate leads to higher growth until the economy reaches its new higher balanced growth path higher path 11 of 30 12 2 Determinants of Technological Progress Technological progress in modern economies is the result of firms research and development R D activities The outcome of R D is fundamentally ideas ideas Spending on R D depends on The fertility of the research process or how spending on R D translates into new ideas and new products and the appropriability th i bilit off research h results lt or th the extent t t tto which hi h firms benefit from the results of their own R D 12 of 30 12 2 Determinants of Technological Progress Th Fertility The F ili off the h Research R h Process P The determinants of fertility include The interaction between basic research the search for general principles and results and applied research the application of results to specific uses The country some countries are more successful at basic research others are more successful at applied research and development Time It takes many years and often many decades for the full potential of major discoveries to be realized 13 of 30 12 2 Determinants of Technological Progress Th Appropriability The A i bili off Research R hR Results l If firms cannot appropriate the profits from the development of new products d they h will ill not engage iin R D R D FFactors at workk include The nature off the Th h research h process Is I there h a payoff ff in i being first at developing a new product LLegall protection t ti P t t give Patents i a fi firm th thatt h has di discovered da new product the right to exclude anyone else from the production or use of the new product for a period of time 14 of 30 Labor Productivity Growth 07 06 06 Labor L b productivity d ti it growth 4 qtr change 05 04 03 02 01 00 01 01 90 92 94 96 98 00 02 04 06 08 10