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How Technology, Research & Development Affect Productivity

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  • 2:31 The Benefits of Higher…
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

Economists consider productivity to be a nation's long-run growth engine. This lesson explores the connection between technology, research & development, and productivity, using real-world examples.

Technology, Research & Development and Productivity

We're talking about technology, research and development, and productivity. There are four important determinants of the productivity of a nation. They include physical capital, technology, human capital, and natural resources. In this lesson, we'll take a closer look at how investments in research and development lead to new technologies that make workers (or human capital) more productive, which leads to greater economic output.

Before we dive into these concepts, I want you to join me as we take a journey into the lives of two hard workers: Jerry and Jenny. Jerry works in the auto plant, helping Generic Motors Corporation assemble brand-new cars that will be shipped out to all the car dealerships across the nation and sold to consumers just like you and me. Day in and day out, they help assemble the engines that go inside the new cars.

Jerry wears both glasses and a white lab coat to work each day. Jerry's job is to think up new ways to increase the fuel efficiency of the new cars that Generic Motors produces. They pay him a salary to better understand the world around him and invent new ways of doing things that will benefit the company. As a result of Jerry's innovative ideas, workers are now able to produce cars that get better gas mileage, which is not only better for the planet's atmosphere but also will cost car owners less to drive.

As a result, Jenny, a pharmaceutical sales rep, can drive farther without filling up for gas. This means she can now see more new business prospects without paying any more for gas. When she gains more doctors' offices as customers, her company's sales increase. When workers at similar companies all over the nation enjoy the same advantage, then Jerry's improvement in technology actually leads to higher productivity and more economic output as measured by the gross domestic product, or GDP for short.

The Benefits of Higher Productivity

What you've just witnessed is what economists call the improvement of productivity. Productivity, which is looked at as the long-run growth engine of any nation, is the amount of output that gets produced per unit of input. Higher productivity raises a nation's standard of living, and it explains why some nations tend to grow faster than others.

Technology Increases Productivity

So, what is technology? Technology is a nation's understanding of how the world works. For example, Jerry's understanding of the world led him to some innovative ideas for a more fuel-efficient car. When a nation develops new technology, it applies this new understanding to the production of goods and services in order to produce more output per unit of input. In other words, workers can produce goods and services faster, better, or cheaper. When Jenny's more fuel-efficient car enabled her to drive farther, her increased productivity led to higher sales, another example of how technology increases productivity.

This is exactly what happened in the late 1990s. According to the National Bureau of Economic Research, there was 'a substantial increase in the pace of technological change in the latter half of the 1990s.' During the first half, technology grew at an annual rate of 1.2%, but this rate more than doubled to 3.1% during the last half of the decade.

Why is this important? Because improvements in technology lead to permanent increases in the productivity of a nation. Of course, the development of the Internet during the 1990s was one of the main drivers of this added productivity. Increases in productivity from technology are nothing new, however. For example, when railroads were developed, workers could transport everything from raw materials to finished goods much faster than before, when steamboats were the fastest method of transport available.

The development of the railroads led to greater economic output.
Historical-Railroad-Photo

The added productivity that trains provided enabled more goods to be transported and sold in the same amount of time, which led to higher economic output. Later on, when the modern assembly line was created, this new technology spurred a revolution in the mass production of goods that we are still enjoying the fruits of even today.

The creation of the modern assembly line allowed for mass production.
Modern Assembly Line

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