05 Technology

Question 1

What determines the level/adoption of technology in a country?

Answer 1

• R&D.
• 􏰀Cross-country spillovers.
• 􏰀Barriers to technology transfer.

Question 2

The majority of R&D is performed by the private sector, but the goverment is important to ___

Answer 2

The majority of R&D is performed by the private sector, but the goverment is important to provide the right incentives (patent systems etc.).

Question 3

How is technology different than physical and human capital?

Answer 3

• Technology is (mostly) about ideas and knowledge.
• Instructions for mixing together raw materials (labor and capital).
  
  • Can be used over and over again (non-rival).
  • Partly non-excludable.

Implications:

• No diminishing returns
• Without legal framework, zero private incentives to innovate but large returns for society

Question 4

Patents

Answer 4

A patent gives the owner the right to produce, use and sell the invention for a period of time (typically 20 years) −→ Temporary monopoly.

The patent office requires:

􏰀 That the invention is novel and non-obvious.

􏰀 Have technical characteristics (not abstract ideas, laws of nature, etc.)

Examples: Pharma, computer technology, zippers, cheese slicer (1925), fertilizer (1903).

Question 5

Challenges with patents

Answer 5

Monopoly.

• 􏰀 Firm charges too high prices - limiting benefits of new technology.
• 􏰀 May reduce R&D incentives: Costly to copy and build on existing technology.
  
  • Patent wars between Apple, Nokia, Microsoft, Google, Samsung ++
  • E.g. Apple suing Samsung for similar icons for apps.

Patent trolls:

• 􏰀 Firms collecting patents with no intention of using them.
• 􏰀 E.g. Personal Audio LLC patenting “podcasts” in 2012.

Question 6

Alternatives to patents

Answer 6

• Secrecy (Coca Cola)
• Open source (Linux, fashion design)
• Public R&D (e.g. for global problems such as AIDS)

Question 7

Relevant questions regarding technology and growth

Answer 7

What is the effect of more R&D on growth?

If technology is partly non-rival, what are the consequences for poor countries?

Question 8

Closed economy framework for looking at technology and growth

Answer 8

L_Y workers employed in manufacturing.
L_A workers employed in R&D.

L = L_Y + L_A

Define γ_A = L_A/L - the share employed in R&D.

Production function

Y = AL<sub>Y</sub> = A(1 - γ<sub>A</sub>)L
y = A(1 - γ<sub>A</sub>) (intensive form)

Higher A -> higher GDP per capita

Higher γ_A (more R&D workers) -> Lower GDP per capita

Technical change

Assume that % growth in A,
Aˆ = L_A / μ

More R&D workers −→ higher growth.
Parameter μ⁻¹ determines how effective R&D is.

Rewrite

Aˆ = L_A / μ = γ_A L / μ

Growth

Recall output is

y = A(1 − γ_A)

If no change in γ_A, then growth is

yˆ = Aˆ = γ_A L / μ

Higher growth when

• Higher share R&D workers γ_A.
• Higher R&D efficiency μ⁻¹.
• Larger population (why?).

Question 9

Effect of shifting labor into R&D

Answer 9

Output per worker decreases in the short run, increases in the long run.

Question 10

Open economy framework for looking at technology and growth:

Model and assumptions

Answer 10

Countries 1 & 2.
L1 = L2 = L, γ_A1 > γ_A2 and A₁ > A₂.

Technological progress through innovation (country 1) or imitation (country 2).

Production functions

y<sub>1</sub> = A<sub>1</sub>(1 − γ<sub>A1</sub>)
y<sub>2</sub> = A<sub>2</sub>(1 − γ<sub>A2</sub>)

Assumptions:
The cost of imitation is

μ₂ = f(A₁ / A₂)

μ₂ < μ₁ (imitation cheaper than innovation).
f’ < 0 (imitation cheaper if the technology gap is large).

Boundary conditions:

􏰀 μ2 → 0 when A1/A2 →∞
μ2 → μ1 when A1/A2→1.

Question 11

Open economy framework for looking at technology and growth:

Imitation costs

Answer 11

μ₂ = f(A₁ / A₂)

Question 12

Open economy framework for looking at technology and growth:

Steady state

Answer 12

Aˆ 1 = Aˆ 2

γ_A1 L / μ₁ = γ_A2 L / μ2

μ2 = f(􏰃A₁􏰄 / A₂) = (γ_A2 / γ_A1) μ₁

Relative level of productivity determined by fundamendal factors γ_A1, γ_A2, μ₁.

Question 13

Open economy framework for looking at technology and growth:

More R&D workers in follower country: Growth rate

Answer 13

γ_A2 ↑ → 2 growing faster → imitation costlier → growth slows until Aˆ₁ = Aˆ₂ .

Question 14

Open economy framework for looking at technology and growth:

More R&D workers in follower country: Productivity and output

Answer 14

γ_A2 ↑ → Short-term increase in 2’s productivity growth rate.
γ_A2 ↑ → Short-term fall in 2’s output.

Question 15

Barriers to technology transfer

Answer 15

• Tacit knowledge: Not all knowledge can be codified
• Skill/capital-biased technical change

Question 16

Tacit knowledge

Answer 16

• Description of patents not always sufficient.
• Learning by doing.
• Michael Polanyi (1958): light bulb factory in Hungary vs Germany.
  
  • 􏰀Enormous productivity differences with same technology and

Question 17

Capital-biased technical change

Answer 17

Higher A only benefits high k and h countries

Question 18

Neutral technical change

Answer 18

Question 19

Living standard ______ from year 1 to 1820
Living standard rose by _____ over the next 200 years

Answer 19

Living standard doubled from year 1 to 1820
​Living standard rose by 20x over the next 200 years

Question 20

The industrial revolution

Answer 20

• The period 1760-1830 in Great Britain and later continental Europe and North America.
• Rapid technological change across a wide range of industries. In particular:
  
  • Efficiency improvements in
    
    • textiles production
    • iron production
  • Invention of the steam engine.
  • Energy: Switch from wood to coal as source of energy.

Question 21

Why is

A^= L_A / μ

not satisfactory?

Answer 21

• As technology becomes more advanced, new innovation becomes increasingly more difficult (“fishing out effect”).
• Decreasing returns to scale: A doubling of LA does not double the growth rate Aˆ

Possible solution / extension:

Here, in steady state, productivity growth can only occur with continuous expansion of the R&D sector.

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