Technological Progress and Growth

Module 4 – Chapter 12

Blanchard, O. (2021). Macro Economics: Global edition, 8th edition. Pearson Education.
 The long run
Output, capital accumulation and technology

Chapter 10: the facts of growth

Chapter 11: Savings, capital accumulation, and output
Chapter 12: technological progress and growth
Chapter 13: the challenges of growth

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Introduction

• Chapter 11 could explain part of the growth story. However, capital accumulation
would cause a burst of growth after an increase in the savings rate, but is not able
to explain long run development as the one in the US or Germany.
• With technology, we can.

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Table of Content

12.1 Technological Progress and the Rate of Growth

12.2 The Determinants of Technological Progress
12.3 Institutions, Technological Progress, and Growth
APPENDIX HOW TO MEASURE TECHNOLOGICAL PROGRESS: THE SOLOW RESIDUAL

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Technological Progress and Growth
Module 4 – Chapter 12
12.1 Technological Progress and the Rate of Growth

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Technological Progress and the Rate of Growth (1)

• Technological progress can lead to:

• larger quantities of output for given quantities of capital and labor
• better products
• new products
• a large variety of products
• The state of technology (A) is a variable that tells us how much output can be
produced from given amounts of capital and labor at any time:
Y  F K , AN 
• With AN the effective amount of labor

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Technological Progress and the Rate of Growth (2)
• With constant returns to scale and a given state of technology, if the amounts of
capital and labor change by x times, output changes by x times

xY  F xK , AxN 

• If x = 1/AN, output per effective worker is a function of capital per effective worker
Y  K 
 f  
AN  AN 
• Diminishing returns to capital and effective labor: adding one unit of effective labor,
for a given level of capital, produces extra output, but as the level of effective labor
rises, the extra output falls. Likewise for capital

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Technological Progress and the Rate of Growth (3)
Figure Output per Effective Worker versus Capital per
Effective Worker

Because of decreasing returns to

capital, more capital per effective Y/AN3
worker leads to smaller and smaller Y/AN2
extra units of output per effective
worker. Y/AN1

Y/AN0

K/AN0 K/AN1 K/AN2 K/AN3

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Technological Progress and the Rate of Growth (4)

• We can now apply the analysis from chapter 11, but in per effective worker terms:
• Savings equals investment: I = S. Savings is a fixed percentage of total income
(output), so investment per effective worker equals
I  K 
 sf  
AN  AN 
• Capital depreciates at a constant rate d.
• The equation of motion for the capital stock per effective worker
K t 1 Kt  K  Kt

 sf  t 
   
AN AN  AN  AN

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Technological Progress and the Rate of Growth (5)

• In the steady state, the capital stock per effective worker is constant, so
K t 1 Kt  K  Kt
 
 0  sf  t 
  
AN AN  AN  AN

• The steady state of the economy is such that capital per effective worker and output
per effective worker are constant, and equal to (K/A N)* and (Y/A N)*, respectively.
So, in terms of capital and output per effective worker, the steady state shows no
growth.

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Technological Progress and the Rate of Growth (7)
Figure The Dynamics of Capital per Effective
Worker and Output per Effective Worker

Capital per effective worker and

output per effective worker
converge to constant values in
the long run.
E

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Technological Progress and the Rate of Growth (8)

• In terms of “per effective worker” the analysis equals the analysis in chapter 11.
• However, note that in terms of output per worker (labor productivity) and output
• If growth in output per effective worker is 0 (in the steady state) then output per
worker must grow at a rate equal to the growth rate of technology (A), gA
• If growth in output per worker is gA, and population growth is gN, then the
growth rate of output will be equal to gA + gN
• Summarizing growth rates in the steady state:
• Growth in output per effective worker: gY – gA – gN = 0
• Growth in output per worker: gY – gN = gA
• Growth in output: gY = gA + gN

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Technological Progress and the Rate of Growth (9)

• To see this, note that output per effective worker: Y/AN grows if
• Output grows, gy, (nominator) faster than the number of effective workers (AN; the
denominator)
• The number of effective workers grows because
• Technology improves: gA
• Employment grows: gN
• Growth in output per effective worker equals gy – (gA + gN) = gy – gA – gN

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Technological Progress and the Rate of Growth (10)

• So, with the growth rate of output per effective worker in the steady state zero it
follows that gy – gA – gN = 0 in other words, the growth rate of output, gY must
equal gA+gN and the growth rate of output per worker gY – gN must equal gA.

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Technological Progress and the Rate of Growth (11)

• With respect to capital per effective worker

• If growth in capital per effective worker is 0, then the growth rate of capital per
worker must equal the growth rate of technology (A), gA
• If growth in capital per worker is gA, and population growth is gN, then the
growth rate of capital will be equal to gA + gN
• With wear and tear equal to d, investment in the steady state must allow capital
to sustain its steady state level of capital per effective worker. This implies that
investment in the steady state equals I = (d + gA + gN)(K*/AN).
• Note that in chapter 11, assuming no population growth and no technology growth,
the growth in output was equal to the growth in output per worker and the growth
in capital was equal to the growth in capital per worker.

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Technological Progress and the Rate of Growth (12)

On the balanced growth path (steady

Table The Characteristics of Balanced Growth
state or long run):
Growth Rate:
Capital per effective worker and
output per worker are constant. 1 Capital per effective worker 0
2 Output per effective worker 0
Capital per worker and output per
worker are growing at the rate of 3 Capital per worker gA
technological progress. 4 Output per worker gA
Capital and output are growing at a 5 Labor gN
rate equal to the sum of population 6 Capital gA + gN
growth and the rate of technological
progress. 7 Output gA + gN

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Technological Progress and the Rate of Growth (13)
Figure 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.

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Technological Progress and the Rate of Growth (14)
Figure The Effects of an Increase in the Saving Rate: II

The increase in the saving rate

leads to higher growth until the
economy reaches its new,
higher, balance growth path.

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Technological Progress and Growth
Module 4 – Chapter 12
12.2 The Determinants of Technological Progress

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The Determinants of Technological Progress (1)
• Most technological progress is the outcome of corporate, government and university research
and development (R&D) activities.
• The level of R&D spending depends not only on the fertility of research (how spending on
R&D translates into new ideas and new products) but, for corporate R&D, also on the
appropriability of research results (the extent to which firms can benefit from the results of
their own R&D).
• Patents give a firm that has discovered a new product the right to exclude anyone else from
the production or use of that new product for some time.
• To sustain growth, advanced countries that are at the technology frontier must
innovate.
• The difference between innovation and imitation explains why countries that are less
technologically advanced often have poor patent protection.

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The Determinants of Technological Progress (2)
Figure Percentage of Total Corn Acreage Planted with
Hybrid Seed, Selected U.S. States, 1932–1956

The Diffusion of New Technology: Hybrid Corn

Each state’s speed of adopting hybrid corn, which

increased the corn yield by up to 20%, was a
function of its profitability.

Source: Zvi Griliches, “Hybrid Corn: An Exploration in the Economics of

Technological Change,” Econometrica, 1957, Vol 25, No. 4, pp 501–522.

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The Determinants of Technological Progress (4)
• Management:
• Some researchers believe that management practices might be stronger than many of the other
factors that determine a firm’s performance, including technological innovations.
• In a study of management practices and performance of more than 4,000 medium-sized
manufacturing operations in Europe, the U.S. and Asia, two economists found that firms used the
same technology but applied good management practices perform significantly better than those
that did not.

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The Determinants of Technological Progress (4)
• Management:

Output per worker

Management/technology
Capital per worker
Human capital per worker

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The Determinants of Technological Progress (4)
• The availability of capital is clearly one key economic benefit brought forward by FDI to the
host economy.
• FDI contributes to economic growth through the diffusion and assimilation of technologies
and technological know-how.
• It has been noted that MNCs may spread technological change through the acquisition of
foreign firms and not through “Greenfield” projects only.
• FDI may also affect technological change through productivity spillovers.

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Technological Progress and Growth
Module 4 – Chapter 12
12.3 Institutions, Technological Progress, and Growth

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Institutions, Technological Progress, and Growth (1)
Figure Protection from Expropriation and
G D P per Person

There is a strong positive relation between

the degree of protection from expropriation
and the level of G D P per person.
This highlights the importance of the
protection of property rights.

Source: Daron Acemoglu, “Understanding Institutions,” Lionel Robbins Lectures, 2004.

London School of Economics. [Link]

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Institutions, Technological Progress, and Growth (2)
Figure 1 PPP GDP per Person: North and South Korea,
1950−1998

After the Korean War, South Korea has

provided private ownership and legal
protection of private producers, while North
Korea relied on central planning with no
property rights for individuals.
Fifty years later, G D P per person was 10
times higher in South Korea.

Source: Daron Acemoglu, “Understanding Institutions,” Lionel Robbins Lectures, 2004.

London School of Economics. [Link]

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Technological Progress and Growth
Module 4 – Chapter 12
APPENDIX How to measure technological progress: the Solow residual

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The Solow residual (1)

• Technological progress is not directly observable

• In 1957, Robert Solow devised a way to construct an estimate of technological
progress under the assumption that each factor of production is paid its marginal
product.
• With the analysis here, we can also see what causes growth when an economy is not
in its steady state.

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The Solow residual (2)
1
Y K 
AN   A1K N 1 Recall from math:
d lnY 1 dY Y
 
dt Y dt Y
lnY  1    ln A   ln K  1    ln N

d lnY ln A ln K ln N
 1      1   
dt dt dt dt

gy  1    gA  gK  1    gN

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The Solow residual (3)

• Assuming capital and labor are paid their marginal product,

• gi refers to the growth of i: Y, A, N
• a is equal to the capital share of income and
• 1-a is equal to the labor share

gy  1    gA  gK  1    gN

• All variables are observable, K, N, a (see chapter 7, labor and capital share) except
the growth rate of technology gA

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The Solow residual (4)

• The growth in output attributable to growth in both labor and capital is equal to
( gK + (1 − )gN). This part is observable.
• The rate of growth or total factor productivity (or the rate of TFP growth), also
called the Solow residual, measures the effects of technological progress as the part
of growth which is not observable from national account statistics:
• residual = gY − ( gK + (1 − )gN) = (1 − )gA
• residual = gY − gN − gK + gN = (1 − )gA
• residual = (gY − gN) − (gK − gN ) = (1 − )gA

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The Solow residual (5)

• This last line offers a way to think about the growth rate of output per worker both
in and out of the steady state

1   g A
 gy  gN    gK  gN 
gy  gN  1    gA   gK  gN 

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 The Solow residual (6)
Here we can decompose growth in labor
gy  gN  1    gA   gK  gN  productivity from 2 components:
- Growth in technology
- Capital accumulation

Growth rate in labor Recall: in the steady state, gK - gN = gA. So, in the
steady state (gy – gN) = (1-a)gA + agA = gA
productivity
In the steady state, the growth rate of labor
Growth in technology productivity equals the growth rate of technology

Countries far below their steady state have 2

Capital accumulation
‘engines’ of growth: capital accumulation and
technology (immitation). Countries close to their
Module 3: all relations that included A (pricing-equation, real wage offered by steady state have only 1: technology at the frontier,
firms, labor productivity, potential output) change in the long run with the as capital accumulation will not contribute a lot
growth rate in productivity. For fixed m: real wages offered by firms, unit labor close to the steady state.
costs, potential output, …

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