Economic Growth and Development

Figure 5.1 shows it would otherwise run into diminishing returns, as at point
A there is little scope left to raise output by further increases in total invest-
ment. A second implication is that the effort by developing countries to catch
up with average income levels in developed countries becomes harder.
Catch-up is no longer just a case of mobilizing resources to boost investment

• which Chapter 3 showed was the key policy recommendation by a genera-
  tion of development economists working in the 1940s and 1950s. Catch-up
  now also requires that developing countries absorb new technologies from
  developed countries. Boosting the rate of investment may be difficult for
  developing countries but they are likely to find it much harder to acquire new
  high technology given its complexity, cost, and protection by patents and
  copyrights.

Technology and more of everything

The thick lines in Figure 5.2 are called the production possibility frontier. This
shows the maximum output that can be produced in an economy at a point in
time when using all available factors of production. Moving along the frontier
by re-allocating factors of production between economic sectors (perhaps by
labour migrating from the rural to the urban economy) shows the quantity of
agricultural output that must be given up to increase output of industrial
production. A second way of representing technological change is to shift the
production possibility frontier outwards. Figure 5.2 shows that technological
change allows a country to avoid the trade-offs associated with scarce
resources and here to consume more of the output of both agriculture and
industry.

Technology and Economic Growth 99

Figure 5.1 Technology and economic growth

Output

(total GDP)

Total investment

Technological

change

tu

pt

u

o

er

o

M

A