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]] 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|last=Greenwood|first=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.|year=|isbn=0-226-36064-4|___location=Chicago|pages=|oclc=290503961}}</ref>.

==Introduction==

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) .

==Market Significance==

==Importance==

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).