Investment-specific technological progress: Difference between revisions

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{{Essay-like|date=December 2007}}

'''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).

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|url=https://www.worldcat.org/oclc/290503961|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>

==Significance==

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

| last=Krusell | first=Per

| title= Investment-Specific R and D and the Decline in the Relative Price of Capital

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[[Image:kid1.jpg|thumb|400px|center|Figure 1]]

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|url=https://www.worldcat.org/oclc/945552571|title=Milestones in microwave chemistry|others=Keglevich, György|date=22 March 2016|isbn=978-3-319-30632-2|___location=Switzerland|oclc=945552571}}</ref>

==A simple example: the microwave oven==

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}}</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}}</ref> and the [[chemical industry]] as a tool for [[organic synthesis]].<ref>{{Cite book|url=https://www.worldcat.org/oclc/945552571|title=Milestones in microwave chemistry|others=Keglevich, György|date=22 March 2016|isbn=978-3-319-30632-2|___location=Switzerland|oclc=945552571}}</ref>

==Measurement==

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[[File:Investment-specific technological progress - Figure 2.jpg|thumb|400px|center|Figure 2]]

One approach to measuring the price of technologicalytechnologically 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.

[[ImageFile:figure4Rent in dollars per square foot, as function of age in years.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.<ref>{{Citation | last1=Greenwood | first1=Jeremy | 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>