Question

1) explain the impact of an increase in technology on the output and capital per worker, please show with a diagram.

2)If the return on capital is constant with time, then explain why tech changes cause investment, with a diagram.

Answer 1

Q 1) The impact of an increase in technology on the output and capital per worker has been phenomenol. Here are few pointers to explain the difference that advancement in technology is making on the output and capital:

A) Technological progress has many dimensions. It may mean Larger quantities of output, Better quality products, New products, a large variety of products and many umimaginable possibilities. c leads to increases in output for given amounts of capital and labor.

B) Output depends on both capital and labor, and on the state of technology. Technological progress reduces the number of workers needed to achieve a given amount of output. It increases index of overall productivity in the economy (A) and number of workers employed in the economy, which can define as the amount of effective labor in the economy.

C) The relation between output per effective worker and capital per effective worker is : Y / AN = f { K / AN }. Hence, we can reach the conclusions that a) The number of workers (the population) is growing at a constant (exogenous) rate and b) Technology is improving at a constant (exogenous) rate.

D) The amount of investment per effective worker needed to maintain a constant level of capital per effective worker is ( gA + gN ) K / AN. This expression will equal investment (per effective worker).

E) In the steady state, Output per effective worker is constant and Output per worker grows at a rate (gA) and Output growth equals (gA+gN). The growth rate of output in the steady state is independent of the saving rate. Capital and effective labor also grows at a rate equal to (gA+gN). Because output, capital, and effective labor all grow at the same rate, (gA+gN), the steady state of the economy is also called a state of balanced growth.

F) Technological progress in modern economies is the result of research and development (R&D) activities. Private spending on R&D depends on: The fertility of the research process, or how spending on R&D translates into new ideas and new products, and the appropriability of research results, or the extent to which firms benefit from the results of their own R&D.

G) The determinants of fertility include: The interaction between basic research and applied research, The institutional environment: education levels, firms characteristics, legal frameworks, etc. Time: It might take many years for the full potential of major discoveries to be realized.

H) If firms cannot appropriate the profits from the development of new products, they will not engage in R&D.

Factors at work include:

The nature of the research process. Is there a payoff in being first?

Legal protection. Patents give a firm that has discovered a new product the right to exclude anyone else from the production or use of the new product for a period of time.

Apart from the above, the in-depth analysis will give us surprising impacts of increase in technology on the output and capital per worker.

Q 2) If the return on capital is constant with time, then there are numerous reasons Technology causes investment.

1) If return on capital remains contstant, the capital invested will not suffice to achieve the expected results. Hence, the investors have to increase the investments by analysing the market situation.

2) The Percentage of investment increased in technology, gives positive results if the investment is properly utilized by thinking when and where it has to be done.

3) But there should be a careful analysis before investing, as the incorrect utilization may lead to losses.