What is the technical progress function?
The technical progress function (TPF) is part of a macroeconomic growth model that accounts for the impact of technology and technological progress on the total amount of economic production that a society can and does produce, as well as factor productivity of production that a society can produce. society employs. Previous models of macroeconomic growth focused on factors such as the endowment of natural resources, a growing workforce, or the accumulation of capital goods and equipment to explain economic growth and development. In the 20th century, economists widely recognized the role of technical improvements in how these various factors of production could be combined more efficiently to improve their productivity as a key to economic growth. The incorporation of a TPF into macroeconomic growth models by several different economists brought this recognition to formal economic models.
The TPF in a given macroeconomic model specifies in mathematical terms the relationship between technological progress and increased production. The specific forms and structure of the TPF may vary from one macroeconomic model to another, but generally show that an increase in the rate of technical progress is the most important factor, or one of the most important, in promoting overall productivity and economic growth. Technological progress can be an important factor in a country’s economic growth because it helps a nation produce more by using better technology on the input side of the production equation.
Based on these macroeconomic models, econometric techniques can be used to empirically estimate the influence of technological progress on total economic output by using a regression model. Therefore, instead of considering the growth of economic output solely in terms of efficiency in the allocation of inputs, the technical progress function provides a way to measure technological progress as a contributor to overall final output.
- The TPF is a component of a macroeconomic model that studies how different factors influence total production.
- The TPF measures how much economic growth can be attributed to the innovation of technological progress in a country.
- Technical progress can appear as incorporated into new equipment or as embodied in productivity gains from new non-equipment related innovations.
Understanding the TPF
The TPF is a component of a multifactorial regression model that is used to understand total production and how different variables affect total production. In a basic production regression, production is explained by the level of efficiency at which the basic variables are assigned to production. For example, labor and machinery are two basic variables that influence production.
With a deeper analysis, economic statisticians can try to divide technological progress into two elements. The two main elements are usually:
- Built-in technical progress: Improved technology attributed to investments in new equipment. The new technical changes that are made are reflected in the equipment.
- Incorporeal technical progress: Improved technology that results in increased production without investing in new equipment.
The technical progress function is a variable added to a production regression analysis. Basically, it is an additional function of the equation that provides information about the technological contributions to production that are not explained by any of the other basic inputs. Generally, as technological progress increases, more production is attributed to technical progress within the production equation and less to the other variables.
The Solow residue
Robert Solow received a Nobel Prize for his work on concepts of technical progress function, also known as the Solow residual, and total factor productivity (TFP). Solow presented the growth model used to understand productivity with his model detailing the different functions that influence productivity. The Solow model includes the functions of capital, labor, and technological progress. Subsequent researchers have modified the Solow model to include additional variables, such as human capital.
In the Solow model, the TPF is the reading of how much technological progress is influencing total production.
Using the model for the years 1909-1949 in the United States, Solow found that only one-eighth of the increase in labor productivity in the United States could be attributed to increased capital. The rest was the result of technical progress in how labor and capital were used. The United States, in other words, became great thanks to American knowledge and innovation.
Total factor productivity can be affected by various influences. While all under the umbrella of technological progress, influences can include technology, cultural factors, and new economic efficiencies. As such, the technical progress function and TFP can also be used to analyze differences in technological influences and technological progress of countries.