Unleashing the Power of Innovation: Exploring New Growth Theory

New Growth Theory - Modern growth theory is named new growth theory - Technology is recognized as an important ingredient in growth - New growth theory is a theory that emphasizes the role of technology rather than capital in Growth process Technology - Technological advance is the result of what the economy does, it - Invests in research and development - Makes advances in pure science - Works out new ways to organize production - The common knowledge aspect of technology creates positive externalities which is key to Growth - Positive externalities are positive effects on others not considered by the Decision maker Learning by Doing - New growth theory also highlights learning by doing - Learning by doing is to improve the methods of production through experience - Learning by doing overcomes the law of diminishing marginal productivity because it Increases the productivity of workers. - Learning by doing leads to increasing returns to scale Technological Lock-In - Does the economy always use the “ best ” technology available?

- Technological lock-in occurs when old technologies become entrenched in the market - More efficient technologies may be available - Network externalities lead to technological lock-in - Network externality is an externality in which the use by one individual makes a technology More valuable to other people Growth Policies - General policies that are good for growth include - Encouraging saving and investment - Formalizing property rights and reducing bureaucracy and corruption - Providing more of the right kind of education - Promoting policies that encourage technological innovation - Promoting policies that allow taking advantage of speciaalization