Chapter 7
Drivers of Growth: Technology, Policy, and Institutions
◼ Chapter Outline, Overview, and Teaching Tips
Chapter Outline
Technology as a Production Input
Technology Versus Conventional Production Inputs
Technology and Excludability
Policies to Promote Productivity
Building Infrastructure
Increasing Human Capital
Policy and Practice: Government Measures to Increase Human Capital
Encouraging Research and Development
Institutions and Property Rights
The Legal System and Property Rights
Obstacles to Effective Property Rights
Policy and Practice: The World Bank’s Doing Business
Policy and Practice: Does Foreign Aid Work?
Endogenous Growth Theory
Allocation of Labor
Production Function
Production of Technology
Sustained Growth in the Romer Model
Factors That Affect Endogenous Growth
Effects of an Increase in the Fraction of the Population Engaged in R&D,
Effect of Changes in the Productiveness of R&D,
Response to an Increase in the Total Population
N
Application: Does Population Growth Improve Living Standards?
The Romer Model and Saving
Chapter Overview and Teaching Tips
The previous chapter’s discussion of growth accounting and the Solow model indicates that understanding
what drives technology and productivity growth is crucial to understanding why some countries are rich
72 Mishkin • Macroeconomics: Policy and Practice, Second Edition
and others poor. In contrast to most macroeconomic textbooks, which give only a cursory treatment of
what drives technology and productivity growth, this chapter provides a deep discussion of this topic.
Because some instructors prefer to spend more time on business cycle analysis, they may not have time to
cover this chapter and can skip it without loss of continuity with subsequent chapters. However, this topic
is inherently fascinating and has generated an explosion of research in recent years.
The first thing to get across to students, which is discussed at the beginning of the chapter, is that technology
is inherently different from other inputs to production and is somewhat magical. It has the big plus of being
nonrivalrous and so can be used over and over again without being used up. Technology does, however, have
Chapter 7 Drivers of Growth: Technology, Policy, and Institutions 73
1. As physical objects, labor and capital inputs are rival and excludable: They can only be used in one
productive activity at a time, so that using them to produce one thing precludes their use to produce
something else, and they cannot be used by producers who have not obtained permission to do so.
2. Government can promote productivity growth by designing policies that lead to more spending on
3. Because of the nonexcludable nature of technology, many of the benefits of new technology will be
4. A patent gives an inventor exclusive rights over the use of his or her invention for a specific period of
time. The inventor may use the new technology or sell or license it for others to use. When
6. Property rights are no better than the legal system that defines, interprets, and enforces them. To
7. The Solow growth model treats changes in technology and productivity exogenously, which renders
it incapable of explaining sustained economic growth and differences across countries in terms of per
74 Mishkin • Macroeconomics: Policy and Practice, Second Edition
8. In the Solow model, diminishing returns to capital move the economy to a steady state at which
10. The growth rate of per capita output at first falls, but ultimately it rises. This is so because an increase
in the fraction of the population engaged in R&D means a decrease in the fraction of workers available
11. The growth rate of per capita output increases and then drops but remains higher than before. Initially,
the increase in total population causes the capital–labor ratio for workers employed in the production
12. An increase in the saving rate causes per capita output temporarily to grow faster as it allows for
more investment per worker and a higher steady state capital–labor ratio, which raises per capita
1. a. A robot is a rival input, as it cannot be used in another activity when used to weld cars in a factory.
The idea of an assembly line is a nonrival good, as many people can use that idea at the same time.
A robot is an excludable input, as it is a piece of property and its owner can prevent others from
using it. The idea of an assembly line has a very low degree of excludability, as it is quite difficult
Chapter 7 Drivers of Growth: Technology, Policy, and Institutions 75
2. The rationale for this policy is to increase technology and to make each U.S. worker more productive.
3. a. The One Laptop per Child program will most surely increase workers’ productivity when today’s
children join the labor force in the future. In the Romer model’s terminology, we can interpret
4. According to Romer’s model, government spending on infrastructure can increase productivity in
many ways. Government spending on education and health usually has high returns. Improving
5. According to Romer’s model, we should expect that countries that have better designed and enforced
property rights are the ones with better standards of living. Properly enforcing property rights increases
individuals’ and firms’ ability to recover their investment needed to advance technology. After the
6.
7. Unfortunately, there is no clear answer for this question. There are valid arguments for both positions.
The prevalence of corruption in a society makes the enforcement of property rights very difficult, as
government officials are often bribed in exchange for preferential treatments or concessions. Also, in
a society in which most people are corrupt, it often pays off to behave as a corrupt individual, making
8. Although the answer to this question is based on personal opinion, both Sachs and Easterly make
good points. Sachs argues that increasing foreign aid can effectively break down the poverty cycle
and allow individuals to escape their poverty traps. This can happen by financing projects that
improve healthcare in poor countries, like mosquito nets designed to reduce the prevalence of
malaria. According to Sachs, only then will individuals be able to stand on their own feet and create
the economic conditions for economic growth. Easterly’s view is basically that giving more money to
poor countries will not solve the problem (a concept he has well documented in his research) and that
Chapter 7 Drivers of Growth: Technology, Policy, and Institutions 77
9. a. The change in technology is
t t A
10. The Industrial Revolution was a period in which technological growth increased at a fast rate. The
invention of the steam machine in the late eighteenth century and its many applications allowed labor
11. The Cultural Revolution years in China can be interpreted as a decline in the fraction of total population
12. There are many potential “stories” that rationalize the idea that a higher population will increase
incentives to spur technological change. One of them is that a higher population puts more pressure
on available resources, like arable land. For the same land area, the country (or region) with the
13. The statement is false. Both Solow’s and Romer’s models conclude that changes in the saving rate do
not affect the long run (i.e., sustained) growth rate of per capita output. In the case of Solow’s model,
1. a.-c.No answer shown.
d. See table below. Total factor productivity in Turkey fell sharply over this period of time, while
total factor productivity increased in South Korea. The Solow model predicts that this will lead to
78 Mishkin • Macroeconomics: Policy and Practice, Second Edition
2. a. See table below. Clearly, the countries that have overall higher economic freedom scores have
much higher average growth rates of per capita real GDP than those with lower scores. Brazil,
Russia, and Argentina have very large negative real GDP per capita growth, suggesting that their
very poor institutions have a large impact on standard of living overall.
b. See table below. The countries that have the biggest movement in the Heritage index generally
appear to also have the biggest movements in real GDP per capita growth. Russia and Argentina
appear to be exceptions to what would be expected; in the case of Russia, its Heritage score was
relatively constant during both periods; however, it experienced a significant turnaround in
Bottom Three Average
–24.58%
3. a. αt = [ At + 1/At – 1]/LFt, where LFt is the (indexed) labor force. Yearly data calculations not shown.
about 0.8 percent in the 1980–1999 period and much lower at 0.19 percent in the post-2000
period. Based on these results, endogenous growth theory would suggest that with a lower
proportion of the workforce dedicated to R&D as in the post-2000 period, this would lead to a
permanently lower growth rate of real GDP per worker.
Average 2000 to 2011
0.19 %
0.84 %
◼ Data Sources, Related Articles, and Discussion Questions
A. For Information About Policy and Practice: Government Measures to
Increase Human Capital
Data Source
UNESCO database: http://stats.uis.unesco.org/unesco/ReportFolders/ReportFolders.aspx. Here you can
find extensive information about different education measurements, like enrollment rates for countries that
80 Mishkin • Macroeconomics: Policy and Practice, Second Edition
are members of the United Nations. You can also get a chart by selecting the table first and then the “see
as a chart” icon.
Related Article
White House, “President Obama to Announce Major Expansion of ‘Educate to Innovate’ Campaign to
Improve Science, Technology, Engineering and Math (STEM) Education,” September 16, 2010:
http://www.whitehouse.gov/the-press-office/2010/09/16/president-obama-announce-major-expansion-
educate-innovate-campaign-impro. This press release indicates the U.S. effort to improve its education
quality.
Discussion Question
During the second half of the twentieth century, many poor countries invested heavily in education and
dramatically increasing their enrollment rates. Despite this effort, most of them remain poor. How is this
possible?
Chapter 7 Drivers of Growth: Technology, Policy, and Institutions 81
82 Mishkin • Macroeconomics: Policy and Practice, Second Edition