Technical Progress Function

The technical progress function is an economic measure which seeks to explain changes in the level of economic output in terms of the level of technical progress and innovation. Rather than looking at economic growth as a form of efficiently allocating inputs, the technical progress function explains economic growth regarding investment in technological progress.

The production function assumes that, given a preset level of technical progress, the output is explained by the level of efficiency by which labor and capital are allocated to production. A technical progress function looks at this production the other way around. Given that inputs are allocated most efficiently, then the technical progress function assets that output is dependent on the level of technical progress. Thus, the greater the level of investment in technical progress over time, the greater the amount of output in the economy.

Technical progress can be broken down into two elements:

• 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 an increase in the output produced from given inputs without investing in new equipment.

• The larger the rate of growth of capital/input per worker, the larger the rate of growth of output per worker, of labor 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.