CH 9 - Productivity and Economic Growth Productivity:...

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Unformatted text preview: Productivity and Economic Growth Productivity: output per hour of work. Productivity growth: the percentage increase in productivity from one year to the next. Productivity Growth During the Past 300 Years Labor Alone We start with a production with only one input: labor. The production function is expressed as Y = F(L) Figure 2 illustrates the production function with labor but no capital inputs. Only Changes in Labor Can Change Output Diminishing returns Diminishing returns (to labor): a situation in which successive increases in the use of an input (labor), holding other inputs constant, will eventually cause a decline in the additional production derived from one more unit of that input. Adding Capital Capital (physical capital): all machines, factories, oil tankers, and other physical resources used in the production of goods and services. Adding Capital Depreciation: the amount by which physical capital wears out over a given period of time. Net investment: gross investment minus depreciation. Adding Capital Once we add capital, the new production function for the economy is Y = F(K, L) where Y = GDP K = capital input L = labor input More capital in the economy will shift the production function upward. Capital Is Also a Factor of Production Capital Diminishing returns to capital: additional units of capital result in an increase in output, but the increase becomes smaller and smaller. Capital From Figure 4, increases in capital (holding the quantity of labor constant) will shift the production function higher. However, subsequent increases in capital shift the production function by a smaller and smaller vertical distance. Capital Has Diminishing Returns Also Technology Technology: anything that raises the amount of the output that can be produced with a given amount of labor and capital. Technology Production function with technology: Y = F(L, K, T) where T = technology Y = GDP K = capital input L = labor input Technology Technological change (or technological progress): improvements in technology over time. Invention: the discovery of new knowledge. Innovation: the application of new knowledge in a way that creates new products or significantly changes old products. Diffusion: spreading of an innovation throughout the economy. Laborsaving technological change: fewer workers are needed to produce the same output. Example: A steampowered tractor replaces a horsedrawn plow. Capitalsaving technological change: fewer machines are needed to produce the same output. Example: Implementation of a night shift, where adding two more sets of crew will increase the productivity of an assembly plant Technology Learningbydoing: a situation in which workers become more proficient by doing a particular task many times. Example: Human capital: a person's accumulated knowledge and skills. The decision to invest in human capital is similar to the decision to invest in physical capital. We should invest in human capital as long as the net present value of the benefits outweighs the net present value of the costs. As the number of Boeing 777 airplanes produced increases, workers become more skilled at producing the aircraft. The Production of Technology: The Invention Factory Patent: recognition that an invention is original and that gives the inventor exclusive rights to use the invention until the patent expires. The number of patents is an indicator of how much technological progress is occurring. The Production of Technology: The Invention Factory More and more technological change is attributable to large expenditures of research and development funds by industry and the government. The supply of technology depends on the cost of producing the new technology and the benefits of the technology. Special Features of Technology Nonrivalry: one person's use of a technology does not reduce the amount that another person can use. Nonexcludability: the inventor or the owner of the technology cannot exclude other people from using it. Spillover: the invention of a technology results in more technology that is invented. Measuring Technology Growth accounting formula: an equation stating that the growth rate of productivity equals capital's share of income multiplied by the growth rate of capital per hour of work plus the growth rate of technology. Measuring Technology Growth rate of productivity = 1 3 Growth rate of capital per hour of work + Growth rate of technology Measuring Technology Suppose the growth rate of real GDP per hour of work is 2 percent per year and the growth rate of capital per hour of work is 3 percent per year. Then the growth rate of technology is Growth = rate of productivity Growth rate of technology 1 3 Growth rate of capital per hour of work Growth rate of technology Growth = rate of productivity 1 3 Growth rate of capital per hour of work Growth rate of = technology 1 0.02 - ( 0.03) = 0.01 3 The growth rate of technology = 0.01 or 1 percent. Technology Policy Policies to improve technological progress: 1. 2. 3. Policy to encourage investment in human capital (higher standards, incentives for good teaching, increased funding for education) Policy to encourage research and innovation (increased funding for R&D, tax credits for research) Increased investment in new capital, especially if technology is embodied in new capital Technology Embodied in New Capital Embodied technological change: the new technology is inseparable from the capital. Example: A new bagel machine. To take advantage of the new technology, you need to buy the bagel machine. Technology Embodied in New Capital Disembodied technological change: taking advantage of new technology without using new capital. Example: A new way to forecast demand for bagels in the morning Is Government Intervention Appropriate? To answer whether government intervention is appropriate in the production of technology, we must ask two questions: 1. 2. Is the private market providing the right incentives? Can the government do better without a large risk of government failure? Is Government Intervention Appropriate? If the answer to question 1 is "no" and the answer to question 2 is "yes," then government intervention is appropriate. Key Terms productivity diminishing returns technological change invention innovation diffusion learning by doing growth accounting formula ...
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