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Knowledge Economy: Definition & Concept

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  • 0:01 Definition
  • 0:58 Disadvantages
  • 1:55 Advantages
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Lesson Transcript
Instructor: Shawn Grimsley
Have you ever heard of the knowledge economy? It has brought, and will continue to bring, changes to the way we work and live and how businesses operate. A short quiz follows the lesson.

Definition of Knowledge Economy

A knowledge economy is an economy in which the production of goods and services is based primarily upon knowledge-intensive activities. In knowledge economy, a large portion of economic growth and employment is a result of knowledge-intensive activities. A knowledge-intensive activity involves the collection, analysis, and synthesis of information.

Success in a knowledge economy requires a commitment of both workers and firms to continually learn and to increase their skills and expertise, which will foster innovation. Examples of knowledge-based organizations include education institutions; media; professional firms providing information-based services like medicine, accounting, finance, engineering, and law; and scientific and technological research companies.

The increasing growth of the knowledge economy is part of a larger shift away from production of tangible goods in developed countries towards intangible or informational goods as well as services. An example of an informational good is the app on your smart phone or new video game for your gaming console.

Disadvantages of Knowledge Economy

Our evolving knowledge economy is not without its problems. The knowledge economy presents issues regarding employment, job security and wage inequality. There is arguably a significant mismatch between the skills of a large number of workers in the United States and the skills required for success in a knowledge economy. These differences in skills contribute to the growing wage inequality in the U.S. job market, since demand for low-skilled labor is much less in comparison with demand for high-skilled workers.

Low demand equates to stagnate or decreasing wages, while high demand will lead to increasing wages as employers compete for the short supply of skilled workers. Since a knowledge economy requires firms and employees to continually learn and update skills, failure to do so may risk job security and firm survival. Increases in technology and innovation may continue to increase productivity, requiring fewer workers, leading to lower employment.

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