The Key Role of Technological Progress in Economic Growth

A key determinant of economic growth is technology, or ways or combining resources to produce goods and services. New management techniques, scientific discoveries, and other innovations improve technology. Technological advances allow the production of more output from a given amount of resources. This means that technological progress accelerates economic growth for any given rate of growth in the labor force and the capital stock.

A particularly dramatic example of technological change is provided in the Economic Insight ‘Technological Advance: The Change in the Price of Light. ” Technological change depends on the scientific community. The more educated a population, the greater it’s potential for technological advances. Industrial countries have better-educated populations than developing countries do. Education gives industrial countries a substantial advantage over developing countries in creating and implementing innovations.

In addition, the richest industrial countries traditionally have spent 2 to 3 percent of their GNP on research and development, an investment that developing countries cannot afford. The developing countries lag behind the industrial countries in developing and implementing new technology. Typically these countries follow the lead of the industrial world, adopting new technology developed hi that world once it is affordable and feasible, given their capital and labor resources.

Economists use the term technological progress in a very specific way: It means an economy operates more efficiently by producing more output without using any more inputs. In practice, technological progress can take many forms. The invention of the light bulb made it possible to read and work indoors at night, the invention of the thermometer assisted doctors and nurses in their diagnoses, and the invention of disposable diapers made life easier at home. All these examples and you could provide many more enable society to produce more output without more labor or more capital.

With higher output per person, we enjoy a higher standard of living. We can think of technological progress as the birth of new ideas. These new ideas enable us to rearrange our economic affairs and become more productive. Not all technological innovations are necessarily major scientific breakthroughs; some are much more basic. An employee of a soft-drink company who discovers a new and popular flavor for a soft drink is engaged in technological progress, just like scientists and engineers.

Even simple, commonsense ideas from workers or managers can help a business use its capital and labor more efficiently to deliver a better product to consumers at a lower price. For example, a store manager may decide that rearranging the layout of merchandise and location of cash registers helps customers find products and pay for them more quickly and easily. This change is also technological progress. As long as there are new ideas, inventions, and new ways of doing things, the economy can become more productive and per capita output can increase.