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Lecture 6 Technological Change

Lecture 6 Technological Change. How does Technological Change Affect Income? Technological change allows us to get more output with the same inputs. In terms of our models, technological change is an increase in A Y = A K or Y = A K B

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Lecture 6 Technological Change

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  1. Lecture 6 Technological Change

  2. How does Technological Change Affect Income? Technological change allows us to get more output with the same inputs. In terms of our models, technological change is an increase in A Y = A K or Y = A K B It is easy to see from these expressions that as A increases, Y increases. Different Types of Technological Change We speak of two basic kinds of technological change: Innovation: The creation of a truly new technology Diffusion: The adoption of a technology from another economy  We shall consider each of these in turn.

  3. Innovation The beautiful aspect of innovation seems to be its “increasing-returns-to-scale property.” For example, suppose that there are a large number of technologies A already available, and that every pair of technologies can be combined into a new technology. Suppose that just 1 percent of those new pairs a useful new product. Then, A(t+1) = A(t) + 0.01 x A(t) 2 For example, if there are 100 technologies today, there are 10,000 two-way combinations (including combining a technology with itself). 1 percent of those, or 100, are new and useful inventions. Thus, there will be 200 = 100 + 0.01 x 100 2 technologies next year. In the following year there will be 600 = 200 + 0.01 x 200 2 technologies. We can see that technologies would expand in a dramatic chain reaction. This can fuel very dynamic economic growth.

  4. Diffusion Diffusion can be the result of imitation, “reverse engineering,” purchase of capital goods that embody the new technology Diffusion works by closing the gap with a leading country. Suppose that the home country has A technologies and the leader has A * technologies. Then, we usually assume the following: A(t+1) = A(t) + g x (A * - A) The rate of growth of A then depends on the proportionate gap between A* and A. [A(t+1) - A(t)] / A(t) = g x [A* - A(t) ] / A(t) Here is a graph of a diffusion process. A* starts at 100, A starts at 10, and g = 0.05

  5. The Social Context of Innovation • I. Belief systems • Religion and belief • Distinctiveness of Western Science: observation, experimentation, refutation • of hypotheses, public reporting of results • “Nature and nature’s laws lay hid in night • God said, “Let Newton Be,” and all was light.” -- Alexander Pope • II. Economic incentives • Ideas as a public good (non-rival production) • Two approaches: intellectual property rights (e.g. patents) and public subsidy of • innovation (e.g. University funding; prizes for innovation, such as measurement • of longitude) • “Agglomeration economies” in the production of knowledge • III. Political control over ideas • State control over science? • Open diffusion of knowledge (the printing press)?

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