Question

(a) [20 marks] Define and explain the term “technological progress”. Illustrate your definition as appropriate. How can technological progress be measured? Illustrate your answer with two examples.
(b) [20 marks in total] Explain how economic growth can be related to technological progress. Which theoretical growth model best applies to each of the facts outlined in points (i) – (iv), below? Explain. i. [5 marks] Real wages were at the same level in England in the year 1280 as in the early 1600s. Real wages rose between these periods, as population fell due to disease. ii. [5 marks] The percentage growth in per capita GDP in the period 1950-1987 for five advanced economies approximately matched the percentage growth in technology, adjusted for a capital factor. iii. [5 marks] Watch production benefitted from division of labour and economies of specialisation in England from the late 17th century until 1815. iv. [5 marks] Waves of innovation have increased computational speed over the past 150 years. The identity of firms that have been technological leaders in these waves has shifted across firms

(c) [10 marks] The UK Government’s Industrial Strategy document (2017) proposes to make the UK the world’s most innovative economy by raising R&D investment to 2.4% of GDP by 2027, increase the R&D tax credit to 12%, and invest £725 million in government funding targeting three broad industrial areas. Critique this strategy. Do you agree that these policies are likely to make the UK the world’s most innovative economy? Outline other changes you think should be considered as part of your answer.

Answer 1

Part A

Meaning of Technological Progress

Technological advancement/progress can be seen as improvement in technical efficiency either by introducing a completely new technology or upgrading the old one. In other words, technological advancement is an increase not in the quantity of the factor of production, but in the ability to transform the existing ones into output. That is, the ability to produce more output with given inputs or fewer inputs for a given output.

How technical advancement is measured?

Nicholas Kaldor developed technical progress function to measure the technical advancement or the Solow Residual (by Robert Solow). This medthod resides on the assumption that the changes in output can't be explained due to changes in capital or number of labour supply are attributed to technological advancement. This is calculated by simple linear regression to estimate growth.

Various examples of technological progress can be cited. The labour productivity during 1970-89 in various countries like USA, Canada, Denmark etc. increased by 2.9%, 2.5% and 3.3% respectively due to technological advancement. Another example is the imrovements in the coffee sector. The handpicking of coffee beans and its processing used to take number of days and the outout was low too. However, new machines used for picking and processing helped in increasing the labour productivity and thereby helped in increasing the output. Many literature studies are availble for both developed and developing nations to corroborate this.

Part b (Partly)

Technological Progress is one of the most important determinants of economic growth since it plays a major role in capital formation (meaning capital accumulation). Technological change/progress includes both upgradation of the existing technology as well discovery of new technology. It helps in acquiring new natural resources, helps in increasing the labour productivity etc. Hence, technological advancement helps in boosting the total output with same or less capital and labour thereby pushing the economic growth.