Technical progress (economics)
Technical progress (or technological progress) is an economic measure of innovation.
Technical progress can be classified into two parts:
- Embodied Technical Progress: improved technology which is exploited by investing in new equipment. New technical changes made are embodied in the equipment.
- Disembodied Technical Progress: improved technology which allows increase in the output produced from given inputs without investing in new equipment.
In the real world, many innovations do not require replacing the entire or some part of the equipment. It can be improved for better use depending upon the change required. Hence technological progress, embodied or disembodied, is matter of degree.
Kaldor's technical progress function
- The larger the rate of growth of capital/input per worker, the larger the rate of growth of output per worker, of labour productivity. The rate of growth of labor productivity is thus explained by the rate of growth of capital intensity.
- In equilibrium capital/input per worker and output per worker grow at the same rate, the equilibrium rate of growth.
- At growth rates below the equilibrium rate of growth, the growth rate of output per worker is larger than the growth rate of capital/input per worker.
- At growth rates above the equilibrium rate of growth it is the other way round, the rate of growth of output per worker is less than the rate of growth of capital/input per worker.
Different technical progress models
- Edward Denison's empirical data proved technology as major contributor to economic growth.
- Simon Kuznets in his model proved and showed importance of technology innovation in the growth of an economy.
- Solow identified technology in his aggregate production function. He also suggested a neutral technical progress and economic growth model.
- Harrod also proposed a neutral technical progress and economic growth model.
Technical progress and human capital
Technology has an important relationship with human capital. Same technology can be applied in two different firms, but output varies with respect to the labour force of that firm. Adaption to new technology is directly proportional to pace of economic growth of the country. Hence labour should be experienced with the technology. Education also plays an important role as it helps in accumulating human capital which in turn helps technology diffusion. Education also helps a person get acquainted with technology efficiently and rapidly.