TECHNOLOGICAL PROGRESS AND ECONOMIC GROWTH. Dongpeng Liu Department of Economics Nanjing University

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1 TECHNOLOGICAL PROGRESS AND ECONOMIC GROWTH Dongpeng Liu Department of Economics Nanjing University

2 ROADMAP INCOME EXPENDITURE LIQUIDITY PREFERENCE IS CURVE LM CURVE SHORT-RUN IS-LM MODEL AGGREGATE DEMAND AGGREGATE SUPPLY INTERMEDIATE-RUN AS-AD MODEL SOLOW MODEL LONG-RUN w/ CAPITAL ACCUMULATION LONG-RUN AS-AD MODEL LONG-RUN w/o CAPITAL ACCUMULATION LABOR MARKET PHILLIPS CURVE MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 2

3 TECHNOLOGICAL PROGRESS There are many forms of technological progress Higher output Better quality More varieties of goods Better institutions Given capital stock and size of employment, technological progress will lead to higher output In this lecture, we also assume that population and employment grow at a constant rate MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 3

4 TECHNOLOGICAL PROGRESS AND PRODUCTION FUNCTION Denote the state of technology by A Y = F(K, AN) Technology is assumed to be labor augmenting AN is called effective labor Aggregate production function still exhibits constant returns to scale μy = F(μK, μan) MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 4

5 TECHNOLOGICAL PROGRESS AND PRODUCTION FUNCTION Due to the labor augmenting nature of the technology, define തy and κ തy = Y AN = F κ = K AN K AN, 1 = f(κ) Output per effective labor depends on capital stock per effective labor MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 5

6 TECHNOLOGICAL PROGRESS AND PRODUCTION FUNCTION MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 6

7 CAPITAL ACCUMULATION Assume that total savings are proportional to total income Change of capital stock I = sy ሶ K t = sy t δk(t) Assume that the growth rate of total population and employment is g N, and the rate of technological progress is g A MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 7

8 CAPITAL ACCUMULATION PER EFFECTIVE LABOR Change of capital stock per effective labor K t = κ t A t N t ሶ K t = κሶ t A t N t + κ t ሶ A t N t + κ t A t ሶ N t ሶ K t = ሶ ሶ κ t +κ t A t N t A t A(t) + κ t ሶ N t = κሶ t + κ(t)(g N t A + g N ) ሶ K t A t N t = sf κ t δκ(t) κሶ t = sf κ t δ + g A + g N κ(t) MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 8

9 CAPITAL ACCUMULATION PER EFFECTIVE LABOR κሶ t = sf κ t δ + g A + g N κ(t) LHS: change of capital stock per effective labor sf κ t : savings per effective labor δ + g A + g N κ(t): required investment to maintain the current level of capital stock per effective labor Depreciation Population growth Technological progress MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 9

10 CAPITAL ACCUMULATION PER EFFECTIVE LABOR As κ t increases by 1 unit, savings per effective labor increases by sf κ t. To maintain a constant level of capital stock per effective labor, investment needs to increase by δ + g A + g N sf κ t is a decreasing function of κ t ; whereas δ + g A + g N is constant When κ t is small, sf κ t > (δ + g A + g N )κ t, κ t increases When κ t is large, sf κ t < (δ + g A + g N )κ t, κ t decreases There exists a κ, such that sf κ = δ + g A + g N κ. When κ t = κ, κ t remains constant MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 10

11 CAPITAL ACCUMULATION PER EFFECTIVE LABOR MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 11

12 BALANCED GROWTH PATH When the economy reaches its steady state, κ t = κ and the growth rate of capital stock per effective labor is 0 Steady state growth rates of capital stock per worker κ A and output per worker f(κ )A are g A Sustainable growth of output per worker is the result of technological progress Steady state growth rates of total capital stock κ AN, total effective labor AN and total output f κ AN are g A + g N As total capital stock, total effective labor and total output all grow at the same rate at the steady state, we call it balanced growth MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 12

13 SAVING RATE AND OUTPUT Saving rate does not affect the sustainable growth rate. When the economy reaches its steady state, the growth rate of output per worker is g A and the growth rates of total output is g A + g N A one time increase of saving rate will temporarily affect the growth rate of output per worker. When the economy reaches the new steady state, growth rates will return their original levels. However, a change in saving rate will affect steady state level of output and capital stock per effective labor. Higher saving rate will lead to higher steady state output per effective labor, ceteris paribus. MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 13

14 SAVING RATE AND OUTPUT MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 14

15 SAVING RATE AND OUTPUT MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 15

16 TECHNOLOGICAL PROGRESS AND INTELECTUAL PROPERTY RIGHTS PROTECTION The rate of technological progress determines the sustainable growth rate The rate of technological progress hinges on firms R&D expenditures How much firms are willing to spend on R&D depends on the size of profits firms can earn once the new technology is developed Only when the intellectual property rights are protected are the firms motivated to do R&D MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 16

17 CONVERGENCE, CAPITAL ACCUMULATION AND TECHNOLOGICAL PROGRESS The model introduced in the last lecture is a special case of the model presented today Based on the Solow model without technological progress, we showed that, we showed that less developed economies grow faster Based on the Solow model with technological progress, we showed that the sustainable growth rate only depends on the rate of technological progress What is the actual reason leading to the convergence since 1950s? Differences in the speed of capital accumulation or technological progress? MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 17

18 CONVERGENCE, CAPITAL ACCUMULATION AND TECHNOLOGICAL PROGRESS Based on economic data, we can reach the following conclusions: Eastern Asian and emerging economies started with lower level of capital stock per worker, the high speed of economic growth observed in these countries are largely caused by fast capital accumulation Convergence between developed countries are mostly caused by different rates of technological progress The slowing down of economic growth in developed countries are the results of slower technological progress It can be inferred that emerging economies with fast economic growth have not reached their steady states/balanced growth paths; whereas the developed economies have already reached their steady states. MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 18

19 SUMMARY Technological progress Capital accumulation per effective labor Technological progress and the growth of output per worker Balanced growth path Sources of economic growth MACROECONOMICS, FALL 2016, DONGPENG LIU, NANJING UNIV 19