Technological

Progress and
Growth
Technological Progress
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.

Technological Progress
and the Production Function
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, and
on the state of technology.
Technological Progress
and the Production Function
Technological progress reduces the number
of workers needed to achieve a given
amount of output.
Technological progress increases AN, which
we can define as the amount of effective
labor in the economy.
With constant returns to scale,
xY F xK xAN = ( , )
Technological Progress
and the Production Function
As in the previous framework, the relation
between output per effective worker and
capital per effective worker is:
Y
AN
f
K
AN
=
|
\

|
.
|
Technological Progress
and the Production Function
Output per
Effective
Worker
Versus
Capital per
Effective
Worker
Assumptions
We now relax the two assumptions we used
before (in Chapter 11):
1. The number of workers (the population) is
growing at a constant (exogenous) rate.
2. Technology is improving at a constant
(exogenous) rate.
Interactions Between
Output and Capital In a Steady State
( ) o + + g g
K
AN
A N
The amount of investment per effective
worker needed to maintain a constant
level of capital per effective worker is
As before, in the steady state, this
expression will equal investment
(per effective worker)
Interactions Between
Output and Capital
Dynamics
of Capital
per
Worker
and
Output per
Effective
Worker
Dynamics of Capital and Output
In the steady state:
Output per effective worker is constant.
Output per worker grows at a rate (g
A
).
Output growth equals (g
A
+g
N
).
The growth rate of output in the steady state is
independent of the saving rate.
Capital and effective labor also grows at a rate
equal to (g
A
+g
N
).
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.
Dynamics of Capital and Output
The Characteristics of the Steady State
Rate of growth of:
Chap. 12 Chap. 11
1 Capital per effective worker 0
2 Output per effective worker 0
3 Capital per worker g
A
0
4 Output per worker g
A
0
5 Labor g
N
0
6 Capital g
A
+ g
N
0
7 Output g
A
+ g
N
0
The Determinants of
Technological Progress
Technological progress in modern
economies is the result of research and
development (R&D) activities.
Private 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.
The Fertility of Research
The determinants of fertility include:
The interaction between basic research and
applied research.
The institutional environment: education levels,
firms characteristics, legal frameworks, etc.
Time: It might take many years for the full
potential of major discoveries to be realized.
The Appropriability of Research Results
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?
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.
Capital Accumulation Versus
Technological Progress
Average Annual Rates of Growth of Output per Capita and
of Technological Progress
Growth of Output per Capita Rate of Technological
Progress
1950-73
(1)
1973-87
(2)
Change
(3)
1950-73
(4)
1973-87
(5)
Change
(6)

France
4.0 1.8 2.2 4.9 2.3 2.6
Germany 4.9 2.1 2.8 5.6 1.9 3.7
Japan 8.0 3.1 4.9 6.4 1.7 4.7
United
Kingdom
2.5 1.8 0.7 2.3 1.7 0.6
United States 2.2 1.6 0.6 2.6 0.6 2.0
Capital Accumulation Versus
Technological Progress
The table illustrates three main facts:
1. The earlier period of high growth of output
per capita was due to rapid technological
progress.
2. The slowdown in growth of output per capita
since 1973 has come from a decrease in the
rate of technological progress.
3. Convergence of output per capita across the
rich countries has come from higher
technological progress rather than from
faster capital accumulation.
Why Did Technological Progress
Slow Down in the mid-1970s?
Spending on R&D as a Percentage of GDP
1963 1975 1989
France
1.6 1.8 2.3
Germany 1.4 2.2 2.9
Japan 1.5 2.0 3.0
United Kingdom 2.3 2.0 2.3
United States 2.7 2.3 2.8
TFP Growth
Science Education
Epilogue

We still cannot explain well enough why
some countries grow more than others.
There seem to be many different reasons for
the vastly different growth performances
across countries (and to a lesser extent
across time).