What is Technological Progress?
Technological progress refers to the discovery of new and improved methods of producing goods. Changes in technology lead to an increase in productivity of labor, capital, and other factors of production. Technology refers to the process through which inputs are transformed into outputs.
A technological change involves the invention of technologies and their release as open source via research and development, the continual improvement of the technologies, and the diffusion of the technologies throughout the industry or society.
Phases of Technological Progress
Invention is the action of inventing something, typically a new technology. It involves a new scientific or technical idea, and the means of its embodiment or accomplishment. To be patentable, an invention must be novel and have utility. It is often included in the process of product development and relies on research.
Innovation is a broad category relative to the current knowledge of the analyzed unit. Everett Rogers thought of innovation as an idea, behavior, or product that appears new to its potential adopter. There are five main attributes of innovative technology, namely, Advantage, Compatibility, Complexity, Trialability, and Observability.
- Relative advantage means the product or behavior is perceived as being better than the alternatives by the person adopting the innovation. Better can mean a lot of different things. It can be a device that can peel a potato faster so it saves time or a seat belt that offers the advantage of greater safety.
- Compatibility refers to how the innovation aligns with the adopter’s lifestyle.
- Complexity is how easy or difficult in innovation is to understand. The easier and innovation is to understand and use, the more likely it is to be adopted. Complex innovations face an additional challenge to mainstream adoption.
- Observability involves seeing the product or behavior in action. It can demonstrate how it can be used. It is easier to get potential adopters to simply observe an expensive product like a car than it is to get all of them in for a test drive. Also, the more people around you that you see using a product, the more likely you feel like buying that product too.
Diffusion pertains to the spread of technology through a society or industry. It is the process by which a new idea, product, or behavior is accepted by the new market. Technology diffusion means the spread of usage/application of new technology from its current user to the other. The diffusion of innovation theory, introduced by Everett Rogers, explains how different groups of people adopt innovation in different ways.
How to Measure Technological Progress
The most common method used to measure technological progress (TFP growth) is through the Solow Residual. The Solow Residual method works under the assumption that all changes in output that can’t be explained by changes in the capital stock or changes in the number of workers must be due to technological progress. The method uses a simple linear regression to estimate TFP growth.
- Regress output on capital and labor using simple linear regression.
- The regression residuals are TFP growth.
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