focus heavily on technological change and its effect on long run economic growth • Keeping technology constant ○ Per - worker production function: shows the relationship between RGDP per hour worked (Y/L) and capital per hour worker (K/L) • Make capital better i. Better machinery and equipment 1. Education/training/experience/entrepreneurship i. Increase in human capital 2. Better institutions 3. There are 3 main sources of technological change: • This is because as you add more capital per hour worked (K/L) output increased but with diminishing returns ○ The per-worker production function increase at a decreasing rate • Diminishing marginal returns to capital exist because adding machines decreases their value • A Model of Growth: Per-worker production Function: , Increase in Labor Productivity: Lesson 7 Page 43
Improvement in growth theory -> explaining where productivity growth comes from ○ According to the Solow model, productivity growth is a key function in explaining long-run growth • Paul Romer: credited with developing New growth theory • Endogenous Model (New Growth Theory): a model of long-run economic growth that emphasizes that technological changes that influenced by economic incentives • Focuses on accumulation of knowledge capital (ideas) as a key component of economic growth • Protect intellectual property with patents and copyrights ○ Subsidize research and development ○ Subsidize education ○ Government policy can help increase the accumulation of knowledge capital by: • Rivalrous; when one person uses it another can not ▪ Decreases returns to scale ▪ Physical capital is rivalrous ○ When one person uses it so can others ▪ Increases returns to scale ▪ Knowledge capital is non-rivalrous ○ Why does it focus on knowledge capital (ideas) instead of physical capital (objects) • New Growth Model: Lesson 7 Page 44
The President has far less influence over the economy • Robert Gordon argues that we have essentially experienced 3 different Industrial Revolutions over the past couple of centuries The first (1750-1830) gave us steam power and railroads • Internal combustion engine, running water, indoor toilets, communications and much more ○ Second (1870-1900) gave us electricity and everything with it • Computers, mobile phones and the like ○ Third is the digital revolution • The iPad and iPhone are just improvements on things we already had ○ Gordon's argument is that as impressive as the third revolution has been in terms of productivity it cannot hold a candle to the electrical revolution • Calls the current US economy "the great stagnation" ○ Believes that new technology will lead to further growth ○ Tyler Cowen believes the US can recapture the economic momentum • Why America's economic growth may be over: Began fading by 2004 ○ Now the benefits of tech innovation flow more to leisure activities such as social media and smartphone apps ○ John Fernald's research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003 •
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