Economic growth and economic development 674

Introduction to Modern Economic Growth • Weak Equilibrium (Relative) Bias: an increase in the relative supply of a factor always induces technological change that is biased in favor of this factor • Strong Equilibrium (Relative) Bias: if the elasticity of substitution between factors is sufficiently large, an increase in the relative supply of a factor induces sufficiently strong technological change biased towards itself that the endogenous-technology relative demand curve of the economy becomes upward-sloping At first, both of these results appear surprising However, we will see that they are quite intuitive once the logic of directed technological change is understood Moreover, they have a range of important implications In particular, subsection 15.3.3 below shows how the weak and the strong relative bias results provide us with potential answers to the questions posed at the beginning of this section 15.2 Basics and Definitions 15.2.1 Definitions Before studying directed technological change, it is useful to clarify the difference between factor-augmenting and factor-biased technological changes, which are sometimes confused in the literature For this purpose and for much of the analysis in this chapter, we assume that the production side of the economy can be represented by an aggregate production function, Y (t) = F (L (t) , H (t) , A (t)) , where L (t) is labor, and H (t) denotes another factor of production, which could be skilled labor, capital, land or some intermediate goods, and A (t) represents technology Without loss of generality imagine that ∂F/∂A > 0, so a greater level of A corresponds to “better technology” Recalled that technological change is Laugmenting if L ∂F (L, H, A) ∂F (L, H, A) ≡ ∂A A ∂L This is clearly equivalent to the production function taking the more special form, F (AL, H) In the case where L corresponds to labor and H to capital, this is also equivalent to Harrod-neutral technological change Conversely, H-augmenting technological change is defined similarly, and corresponds to the production function 660