Investment-specific technological progress: Difference between revisions

Revision as of 10:37, 19 September 2019

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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).

More generally, why is any type of technological progress important? Technological change has made ourhumans 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 2009). 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.

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

==A simple example: the microwave oven==

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 knowknown 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.

==Measurement==

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.

Figure 2 (the pink line) shows how the price of new [[producer durables]] (such as equipment) in the USUnited States 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]]). WePeople use relative prices so wethey 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 taketaken into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and wethat should takebe thattaken 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).

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

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==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 USUnited States 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 USUnited States economy is due to "investment-specific" technological change (Gort et al. 1999) (Greenwood et al. 1997).

==References==