• Labor productivity: the quantity of goods and services that can be produced by one worker or by one hour of work • Quantity of capital available to workers 1. Level of technology 2. How can a country's workers become more productive? • Technological change: a change in the quantity of output firms can produce using a given quantity of inputs • Continuing improvements in machines contributes to increases in labor productivity i. Better machinery and equipment 1. Increases in human capital (knowledge and skills) increases their productivity i. Increases in human capital 2. Labor productivity increases if managers can do a better job of organizing production i. Better means of organizing and managing production 3. There are 3 main sources of technological change • 11.2 What Determines How Fast Economies Grow: Increases in the quantity of capital per hour worked result in movements up along the production function, increasing the quantity of output each worker produces ○ When holding technology constant however, equal increases in the amount of capital per hour worked lead to diminishing increases in output per hour worked ○ Per - worker production function: relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant • Per-worker Production Function: Technological change shifts up the production function and allows an economy to produce more real GDP per hour worked with the same quantity of capital per hour worked • In the long run, a country will experience an increasing standard of living only if it experiences continuing technological change • Technological Change: The Key to Sustaining Economic Growth: New growth theory: a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system • New Growth Theory: Lesson 7 Page 51
working of the market system Increasing returns can exist because knowledge, once discovered becomes available to everyone ○ Knowledge capital is also nonexcludable because once something is known it becomes widely available for other firms to use ○ Romer argues that knowledge capital is subject to increasing returns • Knowledge capital is nonrival and nonexcludable, firms can free ride on the research and development of other firms • Governments can increase the inventive to engage in research and development by giving firms the exclusive rights to their discoveries for a period of years i. Patent: gives firms the exclusive legal right to a new product for a period of 20 years from the date the patent is filed with the government ii. Protecting intellectual property with patens and copyrights 1. Government can help increase the quantity of R&D i.