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'''Investment-specific technological progress''' refers to progress that requires [[investment]] in new equipment and structures embodying the latest technology in order to realize its benefits. To model the influence of [[technological change]] upon production the influence of a technological change upon the specific inputs (i.e. [[Labour (economics)|labor]] and [[Capital (economics)|capital]]) of a [[Production theory basics|production]] model is assessed in terms of the resulting effect upon the [[final good]] of the model (i.e. goods and services).
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To realize the benefits of such technological change for production a [[business|firm]] must invest to attain the new technology as a component of production. For example, the advent of the [[Integrated circuit|microchip]] (an important technological improvement in computers) will affect the production of [[Ford Motor Company|Ford]] cars only if Ford Motor Co.'s assembly plants invest in [[computers]] with microchips (instead of computers with [[punched cards]]) and use them in the production of a product, i.e. [[Ford Mustang|Mustangs]]. Investment-specific technological progress requires investing in new production inputs which contain or embody the latest technology. Notice that the term investment can be general: not only must a firm buy the new technology to reap its benefits, but it also must invest in training its workers and [[management|managers]] to be able to use this new technology.<ref>{{Cite book|last1=Greenwood|first1=Jeremy|title=New developments in productivity analysis - Accounting for Growth|last2=Jovanovic|first2=Boyan|date=2001|publisher=University of Chicago Press|others=Hulten, Charles R., Dean, Edwin., Harper, Michael J., Conference on Research in Income and Wealth.|isbn=0-226-36064-4|___location=Chicago|oclc=290503961}}</ref>
'''Investment-specific technological progress''' refers to progress that requires investment in new equipment and structures embodying the latest technology in order to realize its benefits.
==IntroductionSignificance==
Identifying ''investment-specific'' technological progress within an [[economy]] will determine how an individual behaves in reaction to new technology, i.e. whether the individual will invest their [[savings]].<ref>{{Cite journal|last1=Gort|first1=Michael|last2=Greenwood|first2=Jeremy|last3=Rupert|first3=Peter|date=March 1, 1999|title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change?|url=https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/1999-economic-commentaries/ec-19990301-how-much-of-economic-growth-is-fueled-by-investment-specific-technological-progress.aspx|journal=Economic Commentary|issue=3/1/1999 |publisher=Federal Reserve Bank of Cleveland|pages=1}}</ref> If "investment-specific" technological change is the main source of progress in an [[Industry (economics)|industry]], then the individual would invest in firms to purchase and develop new capital, as technological improvements result in improvements to the goods available to consume. Firms may also choose to train current employees in the new technology or subsidize the education of new employees in the operation of the new technology. As such technological progress has an impact upon the labour market.<ref>{{Citation
To model how something is [[Production theory basics|produced]], think of a box that in one end takes in inputs such as [[Labour (economics)|labor]] (employees) and [[Capital (economics)|capital]] (equipment, buildings, etc.) and in another end spits out the [[final good]]. With this picture in mind now one can ask, how does technological progress affect production? One way of thinking is that technological progress affects ''specific'' inputs (arrows going in) such as equipment and buildings. To realize the benefits of such [[technological change]] for production, these inputs must be purchased. So for example, the advent of the [[Integrated circuit|microchip]] (an important technological improvement in computers) will affect the production of [[Ford]] cars only if Ford Motor Co.'s assembly plants (the red box) invest in [[computers]] with microchips (instead of computers with [[punched cards]]) and use them (they are one of the arrows going in the box) in the production of [[Ford Mustang|Mustangs]] (the arrow coming out). As the name suggests, this is ''investment-specific'' technological progress---it requires investing in new [[machines]] or buildings which contain or ''embody'' the latest technology. Notice that the term ''investment'' can be general: not only must a [[business|firm]] buy the new technology to reap its benefits, but it also must invest in training its workers and [[management|managers]] to be able to use this new technology (Greenwood & Jovanovic 2001) .
| last=Krusell | first=Per ▼ | title= Investment-Specific R and D and the Decline in the Relative Price of Capital ▼ | journal= Journal of Economic Growth | volume=3 ▼ | issue=2 | year=1998 | pages=131–141 }}| doi=10. 1023/a:1009701518509| s2cid=154164754▼ }}</ref>
Technological progress has direct positive impacts upon human [[welfare economics|welfare]]. As a result of new technologies producers can produce a greater volume of product at a lower cost. The resulting reduction in prices benefits the consumer, who now can purchase more.<ref>{{Citation | last1=Greenwood | first1=Jeremy | last2=Vandenbroucke | first2=Guillaume | year=2006 | chapter= Hours Worked: Long-Run Trends
==Importance==
| editor=Lawrence E. Blume, Steven N. Durlauf | title=The New Palgrave Dictionary of Economics | edition=2nd | publisher=Palgrave Macmillan | place=London }}</ref> Women have been able to break away from the traditional "[[housewife]]" role, join the labor-force in greater numbers and become less economically dependent on men.<ref>{{Citation | last1=Greenwood | first1=Jeremy | last2=Guner | first2=Nezih | title=Marriage and Divorce since World War II: Analyzing the Role of Technological Progress on the Formation of Households | journal=NBER Macroeconomics Annual 2008| volume=23 |year=2009| pages=231–276 | doi=10.1086/593087| s2cid=4713240 | url=https://www.econstor.eu/bitstream/10419/35115/1/559459432.pdf}}</ref> Further impacts include a reduction in [[child labor]] starting around 1900.<ref>{{Citation| last1=Greenwood | first1=Jeremy | last2=Seshadri | first2=Ananth| year=2005 | chapter=Technological Progress and Economic Transformation | editor= Philippe Aghion and Steven N. Durlauf | title=Handbook of Economic Growth | publisher=Elsevier North-Holland | place=Amsterdam}}.</ref>
Identifying ''investment-specific'' technological progress is important, because knowing what type of technological progress is operating in an [[economy]] will determine how someone (should) want his or her [[tax]] dollars to be spent and how he or she may want to invest his or her [[savings]] (Gort et al. 1999). If "investment-specific" technological change is the main source of progress, then one would want his or her dollars spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, one may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is "investment-specific" you may want to direct your money towards the research and development (R & D) of new technologies (like quantum computers or alternative energy sources) (Krusell 1998).
[[Image:kid1.jpg|thumb|400px|center|Figure 1]] ▼More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time (Greenwood & Vandenbroucke 2006). Women have been able to break away from the traditional "[[housewife]]" role, join the labor-force in greater numbers (Greenwood et al. 2005) and become less economically dependent on men (Greenwood & Guner 2004). Finally, technological progress has been shown to affect the fall in [[child labor]] starting around 1900 (Greenwood & Seshadri 2005). Figure 1 illustrates this last point: in 1900 child labor's share of the paid labor force began to fall.
An example of investment-specific technological progress is the [[microwave oven]]. The first microwave oven cost between $2000 and $3000 US and was housed in refrigerator-sized cabinets. Through regular technological investment the microwave industry has developed into a competitive market, with small compact units in many households.<ref>{{Citation | last=Gallawa | first=J. Carlton | title=Who Invented Microwaves | url=http://www.gallawa.com/microtech/history.html | year=2005 | access-date=2006-06-02 | archive-date=2017-12-12 | archive-url=https://web.archive.org/web/20171212162021/http://www.gallawa.com/microtech/history.html | url-status=dead }}</ref> Many industries have adopted the microwave through capital or research investment, applications outside the food industry include the [[iron]] and [[steel]] industry as a heating tool<ref>{{Cite journal|last1=Yoshikawa|first1=Noboru|last2=Ishizuka|first2=Etsuko|last3=Mashiko|first3=Kenichi|last4=Chen|first4=Yan|last5=Taniguchi|first5=Shoji|date=2007|title=Brief Review on Microwave (MW) Heating, Its Application to Iron & Steel Industry and to the Relevant Environmental Techniques|url=http://joi.jlc.jst.go.jp/JST.JSTAGE/isijinternational/47.523?from=CrossRef|journal=ISIJ International|language=en|volume=47|issue=4|pages=523–527|doi=10.2355/isijinternational.47.523|issn=0915-1559|doi-access=free}}</ref> and the [[chemical industry]] as a tool for [[organic synthesis]].<ref>{{Cite book|title=Milestones in microwave chemistry|others=Keglevich, György|date=22 March 2016|isbn=978-3-319-30632-2|___location=Switzerland|oclc=945552571}}</ref>
▲ [[Image:kid1.jpg|thumb|400px|center|Figure 1]]
==Measurement==
==A Simple Example: the microwave oven==
WhileThere is no direct metric for measuring technological progress , isas notsuch easy,workarounds economistsbased haveupon founddirect indirectrelationships waysbetween oftechnological estimatingprogress it.and Ifrecordable values are used. "' investmentInvestment-specific'" technological progress makes producing goods easier, then the price of the goods affectedas (relativea toresult the price of otherthe goods ) shouldwill decrease. In particular, "investment-specific" technological advance has affected the prices of two inputs into the production process: equipment and structures . Think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then oneit wouldis expectexpected the price of them towill fall or the value of themthe good towill rise relative to older versions of the same good. ▼An example of investment-specific technological progress is the [[microwave oven]]. The idea of the microwave came to be by accident: in 1946 an engineer noticed that a [[candy bar]] in his pocket had melted while working on something completely unrelated to cooking (Gallawa 2005). The development of this good, from melting the candy bar to the home appliance we know today, took time and the investment of resources to make a microwave small and cheap. The first microwave oven cost between 2000 and 3000 dollars and was housed in refrigerator-sized cabinets (Gallawa 2005)! Today, almost any college student can enjoy a 3-minute microwaveable meal in the smallest dorm room. But a microwave's uses do not stop at the dorm room. Many industries have found microwave heating advantageous: it has been used to dry cork, ceramics, paper, leather, and so on (Gallawa 2005). However, for either college students or firms to reap the benefits of quick warming, they must first "invest" in a microwave oven (that "embodies" the technological advance). To realize the benefits of investment-specific technological progress you must first invest in a technology that embodies it.
Figure 2 (the pink line) shows how the price of new [[Durable good|producer durables]] (such as equipment) in the United States relative to the price of new consumer nondurables has consistently declined over the past fifty years.<ref>{{Citation | last1=Gort | first1=Michael | last2=Greenwood | first2=Jeremy | last3=Rupert | first3=Peter | title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change? | journal=Economic Commentary, Federal Reserve Bank of Cleveland | date=March 1, 1999 }} </ref> To calculate the relative price of producer durables divide the price that firms pay (for the durable inputs of production) by the price that a consumer of the firms product pays. Relative prices are used to represent how many units of equipment can be bought in terms of the a single unit of consumer goods.As a result of technological development, firms have been able to buy comparitevly more units of equipment for each unit of consumption,
==How do you measure investment-specific technological progress?==
with the quality of the goods increasing while the cost of production decreases. When changes in quality are not taken into account the apparent price of equipment undergoes a smaller reduction (see the black line in Figure 2).
▲While measuring technological progress is not easy, economists have found indirect ways of estimating it. If "'investment-specific'" technological progress makes producing goods easier, then the price of the goods affected (relative to the price of other goods) should decrease. In particular, "investment-specific" technological advance has affected the prices of two inputs into the production process: equipment and structures. Think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then one would expect the price of them to fall or the value of them to rise relative to older versions of the same good.
[[File:Investment-specific technological progress - Figure 2.jpg|thumb|400px|center|Figure 2]]
Figure 2 (the pink line) shows how the price of new producer durables (such as equipment) in the US relative to the price of new consumer nondurables (like clothing) has consistently declined over the past fifty years (Gort et al. 1999). To calculate the relative price of producer durables divide the price that firms pay (for the durable inputs of production) by the price that a regular consumer pays (for things like [[jeans]]). We use relative prices so we can say how many units of equipment can be bought instead (or in terms) of buying one unit of consumer goods. Figure 3 (the pink line) says that over time, firms have been able to buy more and more units of equipment instead of one unit of consumption, especially when we take into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and we should take that into account when comparing their prices). When changes in quality are not taken into account (which is wrong) it looks like the price of equipment has not decreased as much (see the black line in Figure 2).
One approach to measuring the price of technologically improved structures is to assign newer building a higher value due to the embodyment of the new technology with the design.<ref>{{Citation | last1=Gort | first1=Michael | last2=Greenwood | first2=Jeremy | last3=Rupert | first3=Peter | title=How Much of Economic Growth is Fueled by Investment-Specific Technological Change? | journal=Economic Commentary, Federal Reserve Bank of Cleveland | date=March 1, 1999 }} </ref> In particular, they should rent for more, i.e. renting a square foot in a new building is much more expensive than renting a square foot in a building forty years old.
[[Image:fi3.jpg|thumb|400px|center|Figure 2]]
[[File:Rent in dollars per square foot, as function of age in years.jpg|thumb|400px|center|Figure 3]]
Measuring the price of structures is more complicated than measuring the price of equipment, but economists have again been able to get an idea of how much progress there has been in structures (such as buildings). One approach is that if newer buildings were constructed or designed using newer technologies then they should be worth more than older buildings (because they '''embody''' the new technology (Gort et al. 1999). In particular, they should rent for more. As Figure 3 shows, this is true. Renting a square foot in a new building is much more expensive than renting a square foot in a building forty years old. So it must be the case that you are paying for a nicer, more functional and maybe even safer building.
Figures 2 and 3 suggest that '''investment-specific''' technological change is operating in the US. The annual rate of technological progress in equipment and structures has been estimated to be about 3.2% and 1%, respectively .<ref>{{Citation (Gort et| al.last1=Greenwood 1999)| (Greenwoodfirst1=Jeremy et| al.last2=Hercowitz | first2=Zvi | last3=Krusell | first3=Per |author-link3=Per Krusell | title=Long-Run Implications of Investment-Specific Technological Change | journal= American Economic Review | volume=87 | issue=3 | year=1997 ). | pages=342–362}} </ref>▼
[[Image:figure4.jpg|thumb|400px|center|Figure 3]]
▲Figures 2 and 3 suggest that '''investment-specific''' technological change is operating in the US. The annual rate of technological progress in equipment and structures has been estimated to be about 3.2% and 1%, respectively (Gort et al. 1999) (Greenwood et al. 1997).
==Conclusion==
In the second section it was mentioned that "investment-specific" technological change is important since it will affect production (both in quality and size). An important question then is, just how much "bang for your buck" do you get with "investment-specific" technological change? The answer is quite astounding; economists have found that 37% of growth in US output (production) is due to technological progress in equipment and 15% is due to technological progress in structures (Gort et al. 1999) (Greenwood et al. 1997). All in all, more than half (37% + 15% = 52%) of the growth of the US economy is due to "investment-specific" technological change (Gort et al. 1999) (Greenwood et al. 1997).
==References==
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[[Category:Macroeconomics]]
[[Category:Economic growth]]
[[Category:Technological change]]
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