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Summary Economics 144 - The Economy CORE unit 16
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Detailed summary based on unit 16 of The Economy CORE textbook. Analysis includes in-depth explanation using graphs.
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UNIT 16 – TECHNOLOGICAL PROGRESS, UNEMPLOYMENT ANDLIVING STANDARDS IN THE LONG RUN
Outcomes
§ Identify how patterns of unemployment across countries reflect differences in
institutions and policies
§ Discuss job creation and unemployment
§ Discuss how and why institutions and policies matter for long-run outcomes
§ Understand and explain South Africa’s context in terms of unemployment, 4th
Industrial Revolution and inequality
Context
§ Technology has made it possible to reduce number of hours needed to work per
day while still improving productivity and efficiency
§ Technological change improves long-run living standards but can cause short-run
unemployment by replacing labour (Units 1-2)
§ How do we explain differences across countries in living standards,
unemployment and inequality? More than just innovation and technological
developments
This unit
§ Unemployment rates were low and similar in the 1960s, then diverged in the
1970s
§ Patterns of unemployment across countries reflect differences in institutions and
policies
§ Production has become more capital intensive, without resulting in mass
unemployment
, § Use a long run labour market model to explain differences in labour market
performance across countries
§ Also look at the effects of technological progress on living standards and
inequality
16.1 TECHNOLOGICAL PROGRESS AND LIVING STANDARDS
Technological progress and living standards
• Innovation rents = profits in excess of the opportunity cost of capital that an
innovator gets by introducing a new technology, organisational form or marketing
strategy
• Creative destruction = process by which old technologies and the firms that do
not adapt are swept away, because they cannot compete in the market. Creative
because failure of unprofitable firms releases labour and capital goods for use in
new combinations
• Capital goods = durable and costly non-labour inputs used in production
(machinery, buildings) not including some essential inputs e.g. water used in
production ta zero cost
• Firms can earn innovation rents by introducing new technology
• Firms that cannot keep up with innovation eventually fail (creative destruction)
• Technological progress and capital goods accumulation are complementary:
§ New technologies require new machines
§ Technological advance is needed for increasingly capital-intensive methods
of production to be profitable
• This process allows a sustained increase in average living standards
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