FROM TECHNOLOGY SPACE TO

ECONOMIC SPACE:
A PRODUCTION FUNCTION
PERSPECTIVE
- S BISALIAH
1. Growth Accounting Analysis: Deep Drivers of Growth.
 An increase in the capital-labour ratio:
 An increase in investment in physical capital through increases in
saving rate  main policy goal implied in Harrod – Domar growth Model.
 Failure of input growth to account for output growth
 Unaccounted output growth: Residual, a measure of ignorance
(Abranovitz)
 Call the residual as technical change  from capital accumulation to
technical change (Solow)
 Allocate technical change to various elements of efficiency or quality
changes in inputs. (Jorgenson, and Denison and others)
  New Growth Tehory (Romer, Lucas and others):
 Growth is endogenous, arising from intentional actions of economic
agents and Government
 Growth Not exogenous
 Sustained increase in physical and human capital  Increasing returns to
scale  permanent increase in the growth rate.
 An important role to human capital to prevent physical capital from
diminishing returns.
 Idea gap between the developed and developing countries 
Globalization to bridge idea gap through capital and technology flows.
 NGT: get into the black box of productivity to understand its origin.
2. Variants of Technical Change: Models:
2.1. Resource Endowments, Resource prices and induced innovations:
 U.S.Model of Technological path:
Labour saving Mechanical Technology (Labour substitutes)
 Japanese Model:
Land saving technology (Land substitutes)
 Output growth due to dynamic factor substitution.
 Now: Both labour saving and land saving technology through labour and land
substitutes. Technological convergence: The case of tomato harvester.
2.2. Other variants:
 Embodied and disembodied technical change.
 Managerial technology.
Institutional technology.
2.3. Economic Interpretation of Technical Change
 R
 R  
 Technical change in P.F framework
  f ( L, K )
  f ( L), and 

 Diagrammatic Representation of TP, AP & MP 

 Increase K, keeping 
 Upward shifts in TP, AP & MP
 Diagrammatic Representation 
 Can we effect upward shifts in TP, AP & MP, keeping L&

 Diagrammatic Representation 
 Y  with same amount of resources
 An increase in efficiency
Possible sources of efficiency:
Technical change (Ex: New machines / New crop variety and so on)
Managerial Technology
Institutional Technology
Learning by doing
An increase in efficiency (   with R )
 Downward shift in unit cost functions (Duality Theorem)
 Upward shift in profit function
 Homothetic parallel shift in isoquants towards origin
 Diagrammatic Representation 
 K
C

D
G
 A
 B
X1 = 1 X1 = 1+, X=1

0 L
HF E
 X1 = The unit isoquants of old technology
 OG&OH = The resource base
 X1 = 1: The unit isoquants of new technology
 Use less amount of K and L to produce the same amount of output
 If OG of K and OH of L employed:
X = 1 to X1 = 1 + 
Where  = proportional increase in output due to technical change alone.
3. Neutral and Non-Neutral Technical change:
 Three versions: Hicks, Harrod and Solow
 Hicks: Measure the nature of technical change along a constant K/L ratio.
 Harrod: Along a constant K/Y ratio
 Solow: Along a constant L/Y ratio.
3.1.  The Hicksian Neutral T. change:
Definition 1:
 MPL   MPL 
   
 MPK  NT  MPK  OT

 B = L - K = 0
L = proportional change in MPL
K = proportional change in MPK
B = Bias = 0
 Proportional change in MPL and MPK
 Definition 2: Constant ratio of output elasticities

 eL  e 
    L 
 eK  NT  e K  OT

 Definition 3: Homothetic (parallel) shift in Isoquants towards origin.

 Definition 4: Downward parallel in unit cost functions.
 Definition 5: Can you think of the behaviour of wage rate and
rate of interest?
3.2. The Hicksian Non-Neutral Technical Change:
Recall two major propositions of the Hicksian Neutral Technical Change.
 Technical change increases the MPK and MPL in precisely the same proportion
 B = L - K = 0
 Marginal productive power of K and L are ‘blown up’ the same proportion.
 The Hicksian Non-Neutral T.C:
 L > K  B > 0
 MPL has risen more than that of MPK.
 Labour-using or capital saving technology
 K > L  B < 0
 MPK has risen more than that of MPL
 Capital – using or labour – saving technology
 Remember B: A measure of technology bias
Question: What will be the impact on w and r (rate of interest) when
B = 0, B > 0 & B < 0 ? and the ratio of w to r?.
4. Technical change: A Production Function Construct:
4.1. Theoretical construct:
Y = ALaKb
Know: A = Efficiency parameter
a and b = output elasticities
L, K = Labour and capital
Y = output
Sources of change in Y: Changes in A, a, b, L and K
 Changes in A, a & b due to technical change: Shift in P.F, called technology effect
 Changes in L & K keeping A, a & b constant (as under new technology):
movement along new P.F, called input effect.
  Neutral and Non-Neutral technical change:
 Neutral Technical change: Parallel upward shift in P.F with no change
in output elasticities (a & b, called slope parameters), but change in only
in efficiency parameter, A.
 Non-Neutral technical change: Upward shift in P.F due to changes in
both efficiency and slope parameters (output elasticities)
 Many other versions of Technical change like no-change in A and change
in slope parameters.
5. Two measurement Devices:
 Ratio analysis: Divide an index of output by an index of input.
 Production Function:
 Estimate two production functions
 Verify for structural break in production functions: Chow Test
 Use covariance analysis to find out nature of technical change.
 Use dummy variable technique to find out whether the structural break
is due to difference in efficiency parameter or slope parameters or both.
 Use the empirical results to measure the technology effect and input
effect of technical change  Methodology: Next session.
Note: Try all these for changes in techniques of production, managerial
technology, institutional technology, and learning by doing.