February 9, 2009
By Wade Rousse
An economy is analyzed by investigating its inputs (capital and labor) and its output (GDP). The difference between the percentage change in output and that of input is sometimes called the Solow Residual. It is the portion of GDP growth that can’t be explained by the growth in capital and labor. Robert Solow was the first person to illustrate how to calculate the residual.
According to economist Edward Prescott, this unexplained portion of economic growth can be interpreted as a measure of technological progress. Over time, the Solow Residual fluctuates substantially. Prescott argues that these fluctuations display the importance of technological shocks as a source of business cycle volatility.
If this is the case, is there a possibility that history will show it was a technological shock, not a fiscal “stimulus” package, that led us out of the current recession?
Posted by Wade at February 9, 2009 9:57 PM
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Can fiscal spending spur technological change? And maybe the larger question is what spurs technological change?
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