1. CHAPTER 12 © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard Technological Progress and Growth Prepared by: Fernando Quijano and Yvonn Quijano

2. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard2 of 32 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. 12-1

3. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard3 of 32 Technological Progress and the Production Function Let’s denote the state of technology by A and rewrite the production function as: A more restrictive but more convenient form is Output depends on both capital and labor (K and N), and on the state of technology (A).

4. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard4 of 32 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 think of as the amount of effective labor, or labor in “efficiency units.” in the economy. With constant returns to scale, More generally,

5. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard5 of 32 Technological Progress and the Production Function The relation between output per effective worker and capital per effective worker is: In words: Output per effective worker is a function of capital per effective worker. which we can redefine as

6. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard6 of 32 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. Figure 12 - 1

7. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard7 of 32 Interactions Between Output and Capital The dynamics of output and capital per worker involve:  The relation between output per worker and capital per worker. Dividing both sides by AN, we get

8. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard8 of 32 Interactions Between Output and Capital  The relation between investment per worker and capital per worker. The dynamics of output and capital per worker involve: Given that then

9. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard9 of 32 Interactions Between Output and Capital  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. The dynamics of output and capital per worker involve: or equivalently The amount of investment per effective worker needed to maintain a constant level of capital per effective worker is

10. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard10 of 32 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. Figure 12 - 2

11. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard11 of 32 Dynamics of Capital and Output This figure focuses on output, capital, and investment per effective worker, rather than per worker:  Output per effective worker increases with capital per effective worker, but at a decreasing rate.

12. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard12 of 32 Dynamics of Capital and Output This figure focuses on output, capital, and investment per effective worker, rather than per worker:  The relation between investment per effective worker and capital per effective worker is drawn as the upper curve, multiplied by the saving rate, s.

13. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard13 of 32 Dynamics of Capital and Output This figure focuses on output, capital, and investment per effective worker, rather than per worker:  Finally, now that we allow for technological progress (so A increases over time), the number of effective workers (AN) increases over time.

14. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard14 of 32 Dynamics of Capital and Output We can now give a graphical description of the dynamics of capital per effective worker and output per effective worker:  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, and so does output per effective worker.  This implies that output (Y) is growing at the same rate as effective labor (AN).

15. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard15 of 32 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 (g A +g N ); therefore, output growth in steady state equals (g A +g N ). Capital per effective worker 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.

16. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard16 of 32 Dynamics of Capital and Output Table 12-1 The Characteristics of Balanced Growth Rate of growth of: 1Capital per effective worker0 2Output per effective worker0 3Capital per workergAgA 4Output per workergAgA 5LaborgNgN 6Capitalg A + g N 7Outputg A + g N

17. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard17 of 32 Dynamics of Capital and Output On the balanced growth path (equivalently, in steady state; equivalently, in the long run):  Capital per effective worker and output per effective worker are constant.  Equivalently, capital per worker and output per worker are growing at the rate of technological progress, g A.  Or, in terms of labor, capital, and output: Labor is growing at the rate of population growth, g N ; capital and output are growing at a rate equal to the sum of population growth and the rate of technological progress, (g A + g N ).

18. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard18 of 32 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 steady-state levels of output per effective worker and capital per effective worker. Figure 12 - 3

19. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard19 of 32 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. Figure 12 - 4

20. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard20 of 32 The 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. 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. 12-2

21. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard21 of 32 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.  Time: It takes many years, and often many decades, for the full potential of major discoveries to be realized.

22. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard22 of 32 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 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.

23. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard23 of 32 The Diffusion of New Technology: Hybrid Corn Figure 1 Percentage of Total Corn Acreage Planted with Hybrid Seed, Selected U.S. States, 1932-1956

24. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard24 of 32 The Facts of Growth Revisited Recall from Chapter 10 that we looked at growth in rich countries since 1950, and we identified three main facts:  Sustained growth, especially from 1950 to the mid-1970’s  A slowdown in growth starting in the mid- 1970’s  Convergence: Countries that were further behind have been growing faster Keep this in mind as we look ahead. 12-3

25. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard25 of 32 Capital Accumulation Versus Technological Progress Fast growth may come from two sources:  A higher rate of technological progress. If g A is higher, balanced output growth (g Y =g A +g N ) 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.

26. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard26 of 32 Capital Accumulation Versus Technological Progress Table 12-2 Average Annual Rates of Growth of Output per Capita and of Technological Progress in Five Rich Countries, 1950-2000 Rate of Growth of Output per Worker (%) Rate of Technological Progress (%) 1950-1973 (1) 1973-2000 (2) Change (3) 1950-1973 (4) 1973-2000 (5) Change (6) France4.82.1-2.75.31.6-3.7 Japan7.12.1-5.07.01.4-5.6 United Kingdom3.41.7-1.73.71.9-1.8 United States2.71.2-1.52.91.4-1.5 Average4.51.8-2.74.71.6-3.1

27. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard27 of 32 Capital Accumulation Versus Technological Progress Table 12-2 illustrates three main facts: 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.

28. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard28 of 32 Fluctuation in the Pace of Technological Progress Why did technological progress slow down in the mid-1970s? The truth is that, despite a large amount of research, this slowdown remains largely a mystery. One hypothesis is that there was a general decline in R&D, which led to lower technological progress. Another hypothesis is that the decline was not in the amount but in the fertility of R&D.

29. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard29 of 32 Institutions and Growth 12-4 Figure 12 - 5 Protection from Expropriation and GDP per Capita There is a strong positive relation between the degree of protection from expropriation and the level of GDP per capita.

30. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard30 of 32 The New Economy and Productivity Growth Figure 1 Moore’s Law, Number of Transistors per Chip, 1970-2000 Moore’s Law predicts that the number of transistors in a chip would double every 18- 24 months.

31. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard31 of 32 The Importance of Institutions: North and South Korea PPP GDP per Capita, North and South Korea, 1950-1998 Figure 1

32. Chapter 12: Technological Progress and Growth © 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard32 of 32 Key Terms  effective labor, or labor in efficiency units  balanced growth  research and development (R&D)  fertility of research  appropriability  patents  Moore’s Law