Lecture 62
(Chapter 12 of textbook)
Capital accumulation cannot by itself sustain growth.
Sustained growth requires technological progress.
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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.
121 Technological Progress
and the Rate of Growth
Technological Progress and the Production Function
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Lets 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 (K and N),
and on the state of technology (A).
AN is called effective labor.
121 Technological Progress
and the Rate of Growth
Technological Progress and the Production Function
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Technological progress reduces the number of workers
needed to achieve a given amount of output (for example: if
we double A we can produce the same quantity of output
with only half of the original no. of workers).
Technological progress increases the output that can be
produced with a given number of workers.
121 Technological Progress
and the Rate of Growth
Technological Progress and the Production Function
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 and
effective labor
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( , ) xY F xK xAN =
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The relation between output per effective worker and
capital per effective worker is:
Y K
f
AN AN
 
=

\ .
In words: Output per effective worker is a function
of capital per effective worker.
, 1
Y K
F
AN AN
 
=

\ .
which we can redefine as
121 Technological Progress
and the Rate of Growth
Technological Progress and the Production Function
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121 Technological Progress
and the Rate of Growth
Technological Progress and the Production Function
Because of decreasing
returns to capital, increases
in capital per effective
worker lead to smaller and
smaller increases in output
per effective worker.
Output per Effective
Worker versus Capital
per Effective Worker
Figure 12  1
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Under the assumptions in Chapter 11:
I S sY = =
I
AN
s
Y
AN
=

\

.

121 Technological Progress
and the Rate of Growth
Interactions between Output and Capital
Y
AN
f
K
AN
=

\

.

I
AN
sf
K
AN
=

\

.

Question: We need to ask what level of investment per
effective worker (I/AN) is needed to maintain a given
level 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, AN
increases over time too. Thus, to maintain the same ratio
of K to effective worker (AN), requires an increase in K
proportional to the increase in AN.
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( ) o + + g g K
A N
( ) o + + g g
K
AN
A N
The amount of investment per effective worker (I/AN)
needed to maintain a constant level of capital per effective
worker is:
Interactions between Output and Capital
121 Technological Progress
and the Rate of Growth
gArate of technological progress
gNrate of population growth
gAN=gA+gN (based on Proposition , Appendix 2)
The investment (I) per worker needed to maintain a constant
level of capital per worker equals:
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121 Technological Progress
and the Rate of Growth
Interactions between Output and Capital
Capital per effective
worker and output per
effective worker converge
to constant values in the
long run.
Note: This figure focuses
on output, capital, and
investment per effective
worker (divided by AN),
rather than per worker
(divided by N as it was in
Ch.11).
The Dynamics of Capital
per Effective Worker and
Output per Effective
Worker
Figure 12  2
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This is a description of the dynamics in the graph:
Because actual investment exceeds the investment level
required to maintain the existing level of capital per effective
worker, K/AN increases.
Starting from (K/AN)
0
, the economy moves to the right, with
the level of capital per effective worker increasing over time.
In the long run, capital per effective worker reaches a constant
level (K*/AN), and so does output per effective worker (Y*/AN).
This implies that output (Y) is growing at the same rate as
effective labor (AN), so that the ratio of the two is
constant.
121 Technological Progress
and the Rate of Growth
Dynamics of Capital and Output
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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 at
the same rate, (g
A
+g
N
), the steady state of the economy is
also called a state of balanced growth.
121 Technological Progress
and the Rate of Growth
Dynamics of Capital and Output
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121 Technological Progress
and the Rate of Growth
The Effects of the Saving Rate
An increase in the saving
rate leads to an increase in
the steadystate levels of
output per effective worker
and capital per effective
worker.
The Effects of an
Increase in the Saving
Rate: I
Figure 12  3
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121 Technological Progress
and the Rate of Growth
The Effects of the Saving Rate
The increase in the saving
rate leads to higher growth
until the economy reaches
its new, higher, balanced
growth path.
The Effects of an
Increase in the Saving
Rate: II
Figure 12  4
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Technological progress in modern economies is the result
of firms research and development (R&D) activities.
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.
122 The Determinants of Technological
Progress
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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.
122 The Determinants of Technological
Progress
The Fertility of the Research Process
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If firms cannot appropriate the profits from the development
of new products, they will not engage in R&D. Factors at
work include:
The nature of the research process. Is there a
payoff in being first at developing a new product?
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.
122 The Determinants of Technological
Progress
The Appropriability of Research Results
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123 The Facts of Growth Revisited
Capital Accumulation versus Technological Progress
in 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 a
higher level.
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Table 122 Average Annual Rates of Growth of Output per Capita and
Technological Progress in Four Rich Countries since 1950
Rate of Growth of Output per Worker (%)
1950 to 2004
Rate of Technological
Progress (%) 1950 to 2004
France 3.2 3.1
Japan 4.2 3.8
United Kingdom 2.4 2.6
United States 1.8 2.0
Average 2.9 2.9
123 The Facts of Growth Revisited
Capital Accumulation versus Technological Progress
in Rich Countries since 1950
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Table 122 illustrates two main facts:
First, growth since 1950 has been a result of rapid
technological progress, not unusually high capital
accumulation (growth rate of output has been roughly equal to
the rate of technological progress.
Second, convergence of output per worker across countries
has come from higher technological progress, rather than from
faster capital accumulation, in the countries that started
behind (see ranking, with Japan at the top; do not forget that
Japan started behind).
123 The Facts of Growth Revisited
Capital Accumulation versus Technological Progress
in Rich Countries since 1950
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Going beyond growth in OECD countries, one of the striking
facts in Chapter 10 was the high growth rates achieved by a
number of Asian countries.
Question: Do these high growth rates reflect fast
technological progress, or do they reflect unusually high
capital accumulation?
Answer: I shall focus on China because of its size and
because of the remarkable high output growth rate (nearly
10%) it has achieved since the early 1980s.
123 The Facts of Growth Revisited
Capital Accumulation versus Technological
Progress in China since 1980
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123 The Facts of Growth Revisited
Capital Accumulation versus Technological
Progress in China since 1980
Table 123 Average Annual Rate of Growth of Output per Worker and
Technological Progress in China, 1983 to 2003
Rate of Growth
of Output (%)
Rate of Growth of
Output per Worker (%)
Rate of Technological
Progress (%)
9.7 8.0 8.2
The nature of technological progress is likely to be different in more
and 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 than
innovate 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 catchup.
NOTE:
We do not cover Chapter 13. If time allows you, please
read it. It relates the technological progress
discussion with concepts we have studied before.
Chapter 13 will not be included in the final exam.
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