Macroeconomics CTW
1a. Technology and innovation are two of the most important parts of economic growth in a country. For a country’s economy to grow you have to either increase the number of inputs in production, or you have to find a way to increase your output with the same number of inputs. This is essentially what technology has done for most economies.
In the Solow model they take the standard Cobb Douglas function Y = F(K, L) to show how growth in capital stock and labor force affect the economy and how they affect a nation’s total output. This function assumes that the number of workers (L) will grow at a constant rate, n. So the economy will grow in output per worker until it hits the steady state. At the steady state level the economy can still grow but only at the rate of labor force growth. This says that at some point all economies will reach a point when their standard of living can no longer be increased, and we know that this is not true. For Solow’s model to show how a countries production and economy can grow over time they have to add Technological Progress to the function. To show the effect that technology has on the growth of an economy they include the efficiency of labor to the original function so, Y = F(K, L * E). The variable “E” means society’s knowledge on production which we think of technology. So L * E measures both, the workers in the labor force and the technology that each worker has at his disposal. So if the technology were to improve then this would cause “E” to increase. When “E” does increase it is saying that each worker is now more efficient and can produce even more output than they could before.
By incorporating technology into the equation they are showing the technological progress is labor-augmenting. This means that as the technology improves it makes each worker more productive by changing the way that they work. The rate of labor-augmenting technological progress is written as g. We know that the labor force grows at the rate
In the Solow model they take the standard Cobb Douglas function Y = F(K, L) to show how growth in capital stock and labor force affect the economy and how they affect a nation’s total output. This function assumes that the number of workers (L) will grow at a constant rate, n. So the economy will grow in output per worker until it hits the steady state. At the steady state level the economy can still grow but only at the rate of labor force growth. This says that at some point all economies will reach a point when their standard of living can no longer be increased, and we know that this is not true. For Solow’s model to show how a countries production and economy can grow over time they have to add Technological Progress to the function. To show the effect that technology has on the growth of an economy they include the efficiency of labor to the original function so, Y = F(K, L * E). The variable “E” means society’s knowledge on production which we think of technology. So L * E measures both, the workers in the labor force and the technology that each worker has at his disposal. So if the technology were to improve then this would cause “E” to increase. When “E” does increase it is saying that each worker is now more efficient and can produce even more output than they could before.
By incorporating technology into the equation they are showing the technological progress is labor-augmenting. This means that as the technology improves it makes each worker more productive by changing the way that they work. The rate of labor-augmenting technological progress is written as g. We know that the labor force grows at the rate