CHAPTER
12
Technological
Progress and
Growth
Prepared by:
Fernando Quijano and Yvonn Quijano
And Modified by Gabriel Martinez
Technological Progress and Growth
 The model in this chapter is identical to the
model in chapter 11 except for two details:
 Technology (and population) grow over time.
 Everything is measured in terms of effective
worker.
– Kind of “worker plus way of doing things.”
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
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Olivier Blanchard
Technological Progress
12-1
and 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.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
 Let’s denote the state of technology by A
and rewrite the 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, and
on the state of technology.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
 A higher A means
– technological progress reduces the number of
workers needed to achieve a given amount of
output.
– technological progress increases AN, which we
can think of as the amount of effective labor, or
labor in “efficiency units.” in the economy.
 With constant returns to scale,
2Y  F (2 K,2 AN )
 More generally,
xY  F ( xK , xAN )
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
 The relation between output per effective
worker and capital per effective worker is:
Y
 K 
 F
,1
 AN 
AN
which we can redefine as
Y
 K 
 f


AN
AN 
In words, output per effective worker is a function of
capital per effective worker.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Technological Progress
and the Production Function
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.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Interactions Between
Output and Capital
 The dynamics of output and capital per
worker involve three relations:
1. The relation between capital per effective
worker and output per effective worker.
Y
 K 
 f

 AN 
AN
Production
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Interactions Between
Output and Capital
2. The relation between capital per effective
worker and investment per effective worker.
I  S  sY
Dividing both sides by AN, we get
I
 Y 
 s

 AN 
AN
Y
 K 
Given that
 f

 AN 
AN
I
 K 
then
 sf 

 AN 
AN
Investment
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Interactions Between
Output and Capital
3. The relation between depreciation per effective
worker and capital per effective worker.
If population rises (at rate gN), the amount of
capital per effective worker will fall.
If technology improves (higher A) at rate gA, K/AN
falls.
If capital depreciates (at rate d), K/AN falls.
Then, what is the investment per effective worker
needed to maintain a constant level of capital
per effective worker?
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Interactions Between
Output and Capital
3. The relation between depreciation per
worker—equivalently, the investment per
worker needed to maintain a constant level of
capital per worker—and capital per worker.
dK  ( g A  g N ) K
or equivalently
(d  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
(d  g A  g N )
AN
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Required
Investment
Olivier Blanchard
Interactions Between
Output and Capital
Dynamics of Capital
per Worker and
Output per Effective
Worker
Capital per effective
worker and output per
effective worker
converge to constant
values in the long run.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Dynamics of Capital and Output
 At (K/AN)0, actual
investment exceeds
the investment level
required to maintain
the existing level of
capital per effective
worker, K/AN
increases.
 In the long run, or in
the steady state of the
economy, capital per
effective worker and
output per effective
worker are constant
and equal to (K/AN)*
and (Y/AN)*.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Dynamics of Capital and Output
 Note that in the
steady state,
Y/AN and K/AN
are constant, but
A and N are
growing.
 How fast do Y
and K grow?
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Dynamics of Capital and 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
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.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Dynamics of Capital and Output
Table 12-1
The Characteristics of Balanced Growth
Rate of growth of:
1
Capital per effective worker
0
2
Output per effective worker
0
3
Capital per worker
gA
4
Output per worker
gA
5
Labor
gN
6
Capital
gA + gN
7
Output
gA + gN
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Effects of the Saving Rate
The Effects of an
Increase in the Saving
Rate: I
An increase in the
saving rate leads to an
increase in the steadystate levels of output per
effective worker and
capital per effective
worker.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Effects of the Saving Rate
The Effects of an
Increase in the Saving
Rate: 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.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Determinants of
Technological Progress
12-2
 Technological progress in modern economies is
the result of firms’ research and development
(R&D) activities. The outcome of R&D is
fundamentally IDEAS.
– For example, a reorganization of production or a
longer-lasting windshield wiper.
 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 of research results, or the
extent to which firms benefit from the results of their
own R&D.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Fertility of the Research
Process
 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. A culture of entrepreneurship.
– Time: It takes many years, and often many
decades, for the full potential of major
discoveries to be realized.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Appropriability
of Research Results
 Firms invest in technology if they expect to
be profitable.
– R&D costs are considerable and the benefits
are often uncertain and far into the future.
 They only receive the profits if they are able
to “appropriate” the technology, that is, to
receive most of the benefits from its
invention.
 If firms cannot appropriate the profits from
the development of new products, they will
not engage in R&D.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
The Appropriability
of Research Results
 Factors at work in appropriability include:
– The nature of the research process. Is there a
payoff in being first at developing a new
product?
 Maybe discovering A will lead to the immediate
discovery of a better technology B.
– 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.
 Patents: basic research versus applied research.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
12-3
The Facts of
Growth Revisited
Capital Accumulation Versus Technological
Progress
 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. In this case, the rate of output growth
equals the rate of technological progress.
– Adjustment of capital per effective worker, K/AN, to
a higher level. In this case, the growth rate of
output exceeds the rate of technological progress.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Capital Accumulation Versus
Technological Progress
1. The period of high growth of output per capita,
from 1950 to 1973, was due to rapid
technological progress, not to unusually high
capital accumulation.
2. The slowdown in growth of output per capita
since 1973 has come from a decrease in the
rate of technological growth, not from
unusually low capital accumulation.
3. Convergence of output per capita across
countries has come from higher technological
progress rather than from faster capital
accumulation.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Why Did Technological Progress
Slow Down in the mid-1970s?
 Why did technological growth slow down?
– Measurement error?
– Growth of the service sector, where
technological growth is slow?
– Not enough spending on R&D?
– “Infertile” new technologies?
 Compare that with the IT revolution.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
12-4
Epilogue: The
Secrets of Growth
 Differences in output per worker between
rich and poor countries are mostly
attributed to differences in the measured
level of technology across countries.
 For various reasons, poor countries are
unable to close this technology gap.
 Some reasons include political instability,
poorly established property rights, lack of
entrepreneurs, and poorly developed
financial markets.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard
Epilogue: The Secrets of Growth
 The poor countries that have grown rapidly in the
last 20 years have experienced a rapid
accumulation of both physical and human capital.
 Some of those countries have relied on the
importance of foreign trade, free markets, and
limited government intervention, while others have
relied on government intervention and industrial
policy—a policy aimed at helping specific sectors
of the economy.
© 2003 Prentice Hall Business Publishing
Macroeconomics, 3/e
Olivier Blanchard