CHAPTER 2 INFORMATION TECHNOLOGY: A NEW ERA?

2 OBJECTIVES ….. Understand the relationship between technological change and industrial revolution. Appreciate the pervasive effect that new technologies can have on the economy and, in particular, on productivity. Understand how industry dynamics can be analyzed using the ‘industry life cycle’ model. Use data and historical examples to support economic arguments.

3 INTRODUCTION….. This chapter focuses on the historical and theoretical relationship between changes in technology, productivity and economic growth. The goal of this chapter is to help students to think about TWO issues: 1.whether the rise of IT has significantly affected economic growth, and 2.whether the rise of new information technologies have changed the way that individual firms and industries operate.

4 TECHNOLOGICAL CHANGE AND ECONOMIC GROWTH  Industrial Revolution: It occurs when technological change fundamentally transforms the way in which a society carries out the production and distribution of goods.  Tutors need to discuss with students the following terms: Invention Innovation Product Innovations Process Innovations

5 General Purpose Technology (GPT) Definition: It is a technology of sufficiently wide application to be used in various parts of the economy and whose impact is pervasive. Main characteristics of a GPT (Lipsey et al., 1998): 1.It must have a wide scope for improvement and elaboration 2.It must be applicable across a broad range of uses 3.It must have a potential use in a wide variety of products and processes 4.It must have strong complementarities with existing or potential new technologies.

6 THE EFFECT OF TECHNOLOGY ON PRODUCTIVITY Productivity: It is an indication of the efficiency of production or distribution. Labor productivity can be measured as output produced per hour of labor. Example: Consider an automobile factory that is able to produce 10 cars per day using 100 hours of labor. If a new invention permits same workers to produce 20 cars in the same amount of time, then their productivity has been doubled.

7 The productivity of the whole economy such as Egypt Economy is calculated as follows: 1.Calculate the total output produced by the economy in one year (GDP or Gross Domestic Product). 2.Divide total output by total labor hours in the year. This gives you the labor productivity.

8 EXAMPLE: If a group of workers produces 10,000 units of output in one year, and 12,000 units the next year. Calculate the percentage increase in productivity. Answer: 12,000 – 10, = 20 % 10,000 It means that output increased by 20%. As the number of workers stayed the same, this is also the increase in productivity. CLASS ACTIVITY: Calculate the percentage increase in productivity if the output expands from 12,000 in year 2 to 15,000 in year 3.

9 DIVISION OF LABOR AND PRODUCTIVITY  The division of labor refers to the degree to which the various tasks involved in the production of a good or service are divided among different workers.  Productivity increases when the division of labor increases. Increases in productivity can be transmitted throughout the economy for several reasons: 1.Increases in productivity can lead to a higher incomes for an economy’s citizens. 2.Increases in productivity tend to lower the cost f production, because more output can be produced with the same amount f inputs. Eventually, increases in productivity tend to reduce prices.

10 THE INDUSTRY LIFE CYCLE The industry life cycle focuses on those economic mechanisms that cause firms to be born (to ‘enter’ an industry), to grow, and to die (to ‘exit’ an industry). The industry structure refers to the characteristics of an industry, such as the number of firms operating in it, the distribution of power between them (whether some are very large and others very small, or whether they are all very large), and the degree to which new firms find it easy to enter the industry). Mechanisms affecting industry structure include the dynamics of entry/exit, technological change and falling prices.

11 CONTINUED….. The industry life cycle is characterized by the following phases: 1.A pre-market or hobbyist phase, in which the product is produced more as a hobby or luxury than for commercial purposes. 2.An introductory phase, in which the product begins to be produced more for commercial purposes than for hobby reasons. 3.A growth phase, in which the industry grows rapidly due to the emergence of a standardized product. 4.A mature phase, in which demand slackens and fewer technological opportunities are available.

12 PRICES AND INDUSTRIAL CHANGE How can we look at price changes over time in industries in which the product undergoes many changes, especially in early stages? We use the concept of the price index. Indices are used a lot in economics. They are basically a simple way of measuring change. Price index is a measure of the average level of prices for some specified set of goods and services, relative to the prices of a specified base period. The most widely used method of constructing an index is based on the notion of the percentage.

13 CONTINUED….. Example:  Suppose that the price of a product is SR5 in 2000 and SR7.5 in 2001 and SR10 in  In this simple example, our market basket consists of only one product. Selecting year 2000 as the base year, we can express the prices in years 2001 and 2002 relative to the price in year 2000 as follows: 1.The price in year 2000 (base year) is equal to 100 per cent 2.Price index, year 2001 = SR7.5 / SR = Price index, year 2002 = SR10 / SR = 200

14 CONTINUED….. The following table summarizes the above calculations: YearActual Price (SR) Price Index (Base 2000)

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