Growth III Flashcards
Describe R&D in relation to technological progress
What is the general definition of R&D?
How does R&D definition differ in the enterprise and in the public sector?
Technological progress is not an outcome of random discoveries, but systematic research and development (R&D) activities
General definition (OECD): Research and experimental development (R&D) comprises
• creative work
• undertaken on a systematic basis
• in order to › increase the stock of knowledge of man, culture and society
and to use this stock of knowledge to devise new applications
R&;D in business enterprise sector: refers to narrow definition of technological progress (defined as a set of blueprints) -> development of new or better products / new cost-saving technologies
R&;D in public sector: e.g. universities, hospitals, museums etc.
Explain the recent developments in TFP growth?
TFP growth stable or even declining
Investments into research effort exponentially increasing -> More and more researchers are needed to keep TFP growing
Research effort has grown tremendously
Research productivity has fallen even more
-> New ideas are harder to find!
Why and when do firms invest in R&D?
R&D spending is an investment
Ideas are in principle not excludable: knowledge diffusion (via labour mobility, informal networks, cooperation between firms)
When do firms invest in R&D?
Spending on R&D depends on:
• The fertility of the research process (does spending on R&D translate into new ideas / products?)
• The appropriability of research results (do firms profit from the results of their own R&D?)
Explain fertility and appropriability of the research process
The fertility of the research process:
• Depends on the interaction between basic research (the search for general principles and results) and applied research (the application of results to specific uses)
• It may take many years, or even decades, for the full potential of major discoveries to be realized
The appropriability of research results
• If firms cannot appropriate the profits from development of new products, they will not engage in R&D • Is there a payoff in being first at developing a new product?
• How can we ensure appropriability? – by legal protection: patents
Explain patents and discuss what is socially optimal
Patents gives exclusive property rights for an invention for a limited period (usually 20 years) for a geographical area
› Similar: copyright laws for art, music, movies, literature ›
How should patent laws be designed?
Consider number of years of protection
› not too long: barriers for using new knowledge are socially sub-optimal (extreme example: new livesaving medicine)
› not too short: R&D is costly, firms need to be reimbursed since otherwise no incentive to do research in the first place
Trade-off: what is socially optimal (10, 20, 30 years)?
Describe innovation compared to R&D.
What is a statistical indicator of inflation?
Only 18% of private companies in Denmark engage in R&D -> 10 companies account for 42% of total private sector R&D spending -> mostly large firms
How do small firms increase productivity?
› Innovation: wider concept
• may refer to products, processes, marketing methods or organizational methods
Criterion: must be new or significantly improved to the firm
• includes implementation of know-how developed (e.g. through R&D) elsewhere
There are several statistical indicators for innovation - patents can be considered as an indirect indicator of innovation because the number of patents is the result of innovation activity undertaken before applying or obtaining the patent.
44% of all Danish firms innovate
• 34% of Danish SMEs
• However: Share low compared to Finland, Sweden, Germany, etc.
Innovation problems in the service sector (e.g. trademark applications)
Describe four other determinants of GDP (other than physical capital and technological progress)
- Institutions (“rules of the game in society”)
• Democracy, property rights, rule of law
• Strong relationship between the degree of protection from expropriation and GDP per capita
Relationships with other “good governance” indicators (absence of corruption, personal security and private property) - Human capital (see lecture on Labour Markets)
- Human capital is very important for economic growth and much new knowledge is acquired and transmitted via both formal and on the job training, experience etc.
- Growth in human capital is closely related to the educational level of the labor force
- A weakness of growth accounting is that the effect of human capital may be attributed to either increases in formal education levels of the work force or in some cases higher TFP - Social capital
• trust, anti-corruption, social norms - Climate change
• Climate change will also have an adverse impact on future economic growth
• A recent study by Kahn et al. (2019) investigated the long-term impact of climate change • Based on data for 174 countries over the years 1960 to 2014 • Considered two scenarios: 1. In the absence of climate change policies (temperature increase of 0.04 ⁰C per year) 2. Abiding by the Paris Agreement (temperature increase limited to 0.01 ⁰C per year)
• The study found that Scenario 1 reduces world real GDP per capita by more than 7% by 2100, while Scenario 2 reduces the loss substantially to about 1%. › The effects vary significantly across countries
Explain what the standard measure of inequality is and alternative measures
The standard measure is the Gini coefficient
The Gini index is a simple measure of the distribution of income across income percentiles in a population.
A higher Gini index indicates greater inequality, with high income individuals receiving much larger percentages of the total income of the population. The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality. Values over 1 are theoretically possible due to negative income or wealth.
Disadvantages of the Gini coefficient:
• interpretation of magnitude
• average measure reflecting potentially different distributions
• downplays shifts at top and bottom of distribution
Alternative measures:
• shares of total income captured by top 1%, top 10% or bottom 50%
e.g. if top 10% of income earners receive 47% of total income, then their income is 4.7 times larger than average income
• ratio of 90th percentile to 10th percentile
Describe recent developments in inequality and their causes
Growing inequality is a global phenomenon
Underlying causes vary
Reasons in Western countries:
• Globalization: import competition and outsourcing (see Lecture on trade)
• Technological progress: automation of routine jobs (see Lecture on labour markets)
• Increasingly less progressive tax system
Growth of income for poorest half of the global population -> high growth in Asia (China and India) › … but top 1% captured twice as much growth as the bottom 50%
Squeezed Western middleclass -> rise of populism?
What can be done to reduce inequality?
- tax progressivity
- equal access to (early) education and well-paying jobs
- public investments (education, health, environmental protection)
When is a firm regarded to be innovative rather than using R&D?
A firm may apply new production technologies or knowledge in general, which has been developed by other firms that have undertaken R&D, in that case the firm using R&D is defined as being innovative
Why does a firm not necessarily need to invest in R&D?
A firm does not necessarily need to invest in R&D, can benefit from knowledge diffusion which typically works through labor mobility or R&D cooperation between firms or international networks. May also arise from public investments.
