POLITICAL ECONOMY OF GROWTH SECSP 01 CFU 9

POLITICAL ECONOMY OF GROWTH SECS-P 01, CFU 9 Finance and Development academic year 2016 -17 8. TECHONOGICAL PROGRESS Roberto Pasca di Magliano Fondazione Roma Sapienza-Cooperazione Internazionale roberto. pasca@uniroma 1. it

Introduction • The technical progress in the Solow model, the exogenous cause of the growth of per capita income steady state. • Before explaining the causes of technical progress (growth theories endogena), this raises the problem of its measurement. • The 'approach' growth accounting 'is proposed to decompose the growth rate of the economy in the contributions of the accumulation of factors of production on the one hand technical progress on the other.

The Production Function • The product of an 'economy is represented by: • The increase of production may 'be due to: • • Increase in the factors of production, capital (K) and labor (L). Technological change. The shape of the production function changes over time (t).

The representation of the output through isoquants • The isoquants of the production function provide a geometric representation of the production function are the pairs of K and L that produce a given output Y.

The representation of the output through isoquants • The production increases for the following reasons: • Increase of only one of the factors. But given the diminishing returns of the single factor, that increase will stop. • Increase of both factors: • Constant returns, increasing or decreasing. • The Solow model assumes constant returns to use theory of marginal distribution • Technological improvement.

Taxonomy Initial date technology with an infinite number of production techniques (possible combinations of K and L), technical progress is said: - 'Labor augmenting', or Harrod neutral, if it increases the productivity 'of the work of all production techniques leaving the productivity' of capital unchanged. (Hypothesis of the Solow model). where γ and 'the growth rate of productivity' of work - 'Factor augmenting' or Hicks neutral, if increases in equal measure productivity 'of labor and capital of all production techniques, leaving the ratio K / L unchanged.

Growth accounting • Separates the effect of the accumulation of factors from that of technical progress on the rate of growth of the economy • The growth rate of the economy and 'equal to the sum of the growth rates of factors, each multiplied by the relative elasticity of production, and a measure of technological change. • Note that the elasticity of production are not directly observable, but under the assumptions of the Solow model, same as the percentage of national income of the factors. • where χ and 'the growth rate of productivity' of capital

Growth accounting TFP, or measure of technical progress, is measured as a residual: where π and 'the share of profits in national income, expressing growth rates. This method, first suggested by Solow (1957), is typically applied using the Cobb-Douglas production and Hicks neutral technical process: where α turns out to be both the elasticity 'of production to capital, and the share of profits in income.

Growth accounting –results • The first estimates for the United States for the first half 'of the century ('56 Abramovitz, Solow '57) show that TFP is responsible for almost 90% of the growth of output per capita. • However, this result is' vitiated by errors of measurement in the quality of the factors that tend to underestimate their impact.

Growth accounting – insights – 1) Technical progress embodied in capital goods. The new technologies, at least in part, are incorporated in the new capital goods. Need 'to measure the stock of capital in units' efficiency (τ): where λk and 'the rate of improvement of the quality' of capital goods. The growth rate (τ) depends on: the growth of the stock of physical capital, the rate of improvement of the quality 'of goods, changes in the age' average stock of capital.

Growth accounting – insights – 2) Improvements in the quality 'of the work. Each one unit 'of physical work can' increase its efficiency by: - Accumulation of human capital (eg education) - job experience (learning by doing) These two channels have become the starting point of the analysis of endogenous growth

Growth accounting – insights – 3) structural change in the use of factors in favor of the activities 'more' productive. The aggregation of the factors K and L hides the different productivity of the various capital goods quality and heterogeneous work. The contribution of a factor shifting resources from one sector with low productivity to high productivity increases (ex from 'agriculture industry).

Growth accounting – developing countries vs developed – Main trends (1960 -94): • The key role of accumulation of factors • Important but limited compared to developed countries TFP • Important role in the reallocation of resources between sectors. interpretation: The industrialized countries are more 'close steady state and have to resort to technical progress in order to grow, on the contrary the developing countries can use the initial benefits from capital accumulation