Principles of Macroeconomics / Unit 4 MAC 0313 worked example, 60 to 90 seconds
Capital Deepening or Technological Change?
The idea
Both raise output per worker, and the test is whether the economy moved along its production function or the function itself moved. Capital deepening gives each worker more of the same kind of input, so the economy travels up the existing curve and meets diminishing returns. Technological change lets the same inputs produce more, so the whole curve shifts upward and the diminishing returns are escaped rather than obeyed. Ask what changed: the quantity of inputs per worker, or what a given quantity can do.
In practice
Worked example: a firm buys a second identical machine for each worker, which is deepening. A firm installs software that lets the existing machines run without stopping, which is technological change. A country that doubles years of schooling is deepening its human capital; a country that discovers a better way to teach is changing its technology.
Where people slip
The two are hard to separate in practice, because new capital usually arrives with new technology built into it. Growth accounting handles this by measuring the inputs it can and attributing the unexplained remainder to technology.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics