Solow Growth Model: Technology and Productivity

In the basic Solow model we hold technological progress and population growth constant. Capital stock and output was dependent on the investment rate in which a country accumulates capital and the depreciation rate of said capital. The Solow model equalizes an economy into a long run steady state, when inflows or savings rate directly offsets outflows or depreciation rate. At this equilibrium capital stock does not change and the economy is at the highest level of consumption that is attainable. Assuming population growth is held constant, the only way to effectively and positively change capital stock and output in the long run at new steady state equilibrium is to either increase technological advancements or the way we use technology.

via http://www.itworld.com/article/2823667/it-management/160599-Innovation-nation-13-technology-advancements-made-in-Japan.html
via http://www.itworld.com/article/2823667/it-management/160599-Innovation-nation-13-technology-advancements-made-in-Japan.html

After technological progress was incorporated into the growth model, we could essentially split labor up between efficiency of the workforce. Workers in less developed countries are not as productive as workers in developed countries. For the most part everyone has access to the technology, but some in developing countries do not know how to use the technology correctly. This is where a separation between more efficient and less efficient comes from. This helps us understand a component of the model. The impression Solow makes is that the further away from the steady state a country is in, developing countries, the faster its growth rate. When the country initially increased investment, in both human and physical capital, they would see massive growth because of the technology, but as they approached the steady state, since technology hasn’t changed and because the laborers already learned how to use the technology growth would begin to flatten until they reach equilibrium. Technological progress, not the utilization of technology has to be exogenously shocked (e.g. Industrial Revolution, Digital Revolution, Information Age, etc.) to increase capital stock and output.

After an exogenous technology shock an economy would see a shift with both the savings curve and production function and the economy would be at a new steady state with both a higher capital stock and output. Holding the assumption that technology is information that both poor and wealthy nations recognize, a technology shock would theoretically increase the steady state for those currently at equilibrium and those who have yet to attain it. While rich nations have the knowledge to utilize new technology from a shock, mostly because their research and development was responsible for the shock, poor nations need an extra kick to help apply the technology to production.

Encouraging technological advancements: patents, tax cuts from research and development, government subsidized research to universities and specific industry based technology research incentives are some ways rich countries are attempting to make technological progress and increase the steady state output and capital levels. Rich countries’ labor forces have the capacity to take what technology they currently have and develop it to become more productive. Poor countries are not as capable. While poor countries have the technology available to one day be more productive, they must first invest in human and physical capital before they can apply the technology and then further develop it.

via https://kidgorgeous514.wordpress.com/2013/01/07/technological-advancements-is-it-really-moving-us-forward/
via https://kidgorgeous514.wordpress.com/2013/01/07/technological-advancements-is-it-really-moving-us-forward/

 

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