Kuchseyla LY

RUPP \ IFL \ DIS \ E4.2 (2012-2013)

Incorporating Technological Progress into the Solow Model

Cobb-Douglas production function: = 1 Suppose = 1/(1) = 1 The production function is thus = 1 1 = ()1 : number of effective workers per actual worker : number of effective workers Per effective worker term: = =

()1 = ()11 = ( ) =

= Change in capital stock over time: () ( + ) () = = = = = 2 () ()2 ()2 = + ) = ( ) ( )= ( : change in capital stock : change in time : change in capital stock per effective worker over time, = / : change in capital stock over time, = / : change in number of workers over time, = / : change in number of effective workers per actual worker over time, = / : growth rate of the number of workers, = / : growth rate of the number of effective workers per actual worker, = /

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Kuchseyla LY

RUPP \ IFL \ DIS \ E4.2 (2012-2013)

We have: = and growth rate of the labor force is 0, =0 = = = ( + )

From the above per effective worker term: = = ( + )

Steady State
Steady-state level of capital per effective worker:
= ( + ) = 0 = ( + )

= +
1 =

= (

1/(1) ) +

Steady-state level of output per effective worker:

= =(

/(1) ) +

Steady-state level of total output: Output per effective worker, , is constant in the steady state. What about total output? We start with the definition of , = log =

log log()

log = log log() log = log log log (log ) (log ) (log ) (log ) = (log ) (log ) (log ) (log ) =

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Kuchseyla LY

RUPP \ IFL \ DIS \ E4.2 (2012-2013)

1 1 1 1 = = =0 We have assumed that there is no growth in the labor force, = + and output per effective worker is constant, =0 = Therefore, total output grows at the growth rate of . We can rewrite this equation in terms of our original measure of productivity, , = 1/(1) log = log 1/(1) log = 1 log 1

(log ) 1 (log ) = 1 (log ) 1 (log ) = 1 1 1 1 = 1 = 1 1 1 ) 1

=(

The Effect of a Change in Technology Growth

Earlier we have the constant output per effective worker which makes the growth rate of output per effective worker nil, = 0. However, the time at which technological progress speeds up makes the change to the level of steady state causing the output per effective worker to vary. Let the increase in be denoted , = + + Change in capital stock:
= ( + ) = 0

= When technology increases,

1 = ( + ) = 0

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RUPP \ IFL \ DIS \ E4.2 (2012-2013)

1 1 = ( + + ) = ( + ) = 0

= Change in output per effective worker: = log = log log = log (log ) (log ) = (log ) (log ) = 1 1 = = = Change in total output: = + + = + (1 ) The initial effect of a rise in the growth rate of technology by some amount will be to raise the growth rate of total output by (1 ) . Overtime, however, as the economy moves to a new steady state, will fall and will approach 0. In the new steady state, the growth rate of total output will have risen by the full amount .

Weil, D. N. (2009). Incorporating Technological Progress into the Solow Model. In D. N. Weil, Economic Growth (2nd ed., pp. 239-243). Boston: Pearson Education Inc.

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