Quality ladder theory-based Implication and relationship with economic growth.doc

Quality ladder theory-based Implication and relationship with economic growth Recently, the theory of quality ladder has made a lot of achievements theoretically and practically. However, the discussion on whether it will benefit the economic growth is still heated. In this paper we will first make a review on the sources of the theory of quality ladder based on the Schumpeterian endogenous growth model, and then we began to try to explain the specific relationship between the model and economic growth in such aspects as: the technological progress and the economic growth, the “creative destruction” affection and the capitalization affection, the influence of employment policy has on the economic growth and the unemployment rate and so on in the theory of quality ladder; and then we will talk about the relationship between the market and the economic growth, and finally we try to reveal certain shortcomings in the theory of quality ladder.We have developed a model of on-going product improvements. This model draws several building blocks from earlier work by Segerstrom et al. (1990) and Aghion and Howitt (1990). Entrepreneurs race to bring out the next generation of a continuum of goods. In each industry success occurs with a probability per unit time that is proportional to the total R&D resources targeted to improving that product. Each product follows a stochastic progression up the quality ladder. But the equilibrium is characterized by an aggregate rate of innovation that is determinate, and constant in the steady state. The model captures many realistic aspects of the innovation process. Individual products become obsolete after a time. Progress is not uniform across sectors. Research responds to profit incentives. And innovators are able to benefit from observing and analyzing the research successes of their rivals. These features fit the detailed historical descriptions of industrial R&D provided by Freeman (1982) and others.Summary on the theory of quality ladderQuality ladder theory also is called the Schumpeterian endogenous growth model, which has introduced the concept of product innovation and Schumpeters “creative destruction” thinking into it. Based on the theory, it has discussed a series of economic and structural problems as dynamic technological progress, economic growth and unemployment, market structure and economic growth, economic cycles and economic growth, as well as system and economic growth. The apparent significance of the quality ladder model lies in that it could make the economic growth and improve the economic to certain extent, which has been proved theoretically and practically. And also, it has important effect on promoting economic growth theory. Schumpeter's economic thinking is the modern form of the resurrection, and showing the increasingly important influence in modern economics, whose outstanding performance is Schumpeter's "creative destructionIn Schumpeter's view, the "creative destruction is the essential fact of capitalism; the important issue we should consider is to do research on how to create capitalism and thus destroy the economic structure, which relies on the creation and destruction of this structure instead of primarily through price competition. Every time the large-scale innovation will rule out the old technology and production systems, and establish a new production system. Schumpeter's "creative destruction" thinking has been brought into growth theory in the neo-classical framework and its formal attempt began in Segerstrom, Anant and Dinopoulos (1990), after which, from the A-H (1992 ) and Grossman and Helpman (1991) classic article, Schumpeter's approach has become a very important method in the theory of endogenous economic growth. AH (1992) established the endogenous growth model with a random factor driven by vertical innovation; and 10 years later, AH and some other scholars has studied a wide range of structural problems of economic growth and unemployment, market structure and economic growth, economic fluctuations and growth as well as system in the framework of "creative destruction". This article intends to describe the specific connotation as well as its relationship with economic growth based on the AH (1992) Basic model.Quality ladder-based relationship between the economic growth and the technological progressEconomic growth and unemployment is a macroeconomic eternal theme, but in macroeconomics, both of which are usually studied separately. Unemployment is generally seen as a result of the economic cycle, in the long term, the unemployment rate is determined by the natural unemployment rate , while the economic growth of the natural rate of unemployment has not been fully studied. AH (1994) discussed the relationship between economic growth and unemployment in the context of technological progress based on the quality ladder theory put forwards by Schumpeterian in1992, some other scholars research on the relationship between them are extended to the growth in the labor market which is not entirely sufficient. And it has discussed something about the relationship between quality ladder theory and the unemployment rate. Quality ladders Creative destruction and capitalizationPissarides (1990) was the pioneer to talk about the relationship between the quality ladder and economic growth in the framework of Equilibrium Unemployment Theory, with the search for matching theory. In his opinion, the quality ladder model will have two basic effect on the economic growth, that is:first, it will promote the economic growth and conversion rate of working, at the same time leading to a high unemployment rate. On the other hand, it will promote the improving of productivity efficiency, and ultimately reduce the natural rate of unemployment, which is called the capitalization effect.Within the framework of "creative destruction", AH (1994) studied further to explore the two aspects of the impact of quality ladder model on employment, based on the search matching theory, that is "creative destruction" effect and the capitalization effect. Economic growth driven by technological progress "destroyed" departments and enterprises using the old technology, leading to the unemployment of workers, which is known as the economic growths "creative destruction" effect on unemployment. When experiencing faster economic growth, technological progress makes the marginal profit of the manufacture increase ,which will encourage the investors to apply the new technology to produce and earn the profits as much as possible, thus absorbing a lot of new labor, which is called the capitalization effect.For the “creative destruction”, we can imagine the matching speed between the workers and manufacturing unit as m(1，v), in which the 1 represented the total labor force that takes part in the labor matching,v means the total vacant posts. M means the increasing function of v. and in the steady condition, the total vacant post v remain unchanged, and the balanced unemployment rate and determined by the following formula: Formula 1In the formula 1, the u means unemployment rate, the S means the life circle of manufacturing unit, the p(v) means the flowing amount of unemployed workers reemployment job, which is equal to the matching rate between the workers and manufacture unit, that is to say, we can conclude the certain results form the following formula: Formula 2The left of the above formula represents the flow of employment, which equals to the aged frequency of manufacture unit multiplying the amount of productivity establishment (1-u)；the right can be regarded as the flowing amount of unemployed workers reemployment job, it can also be expressed as the following: Formula 3when the technology-driven growth has accelerated, the Lifetime S of production units will be shortened, making the job destruction accelerated, and balanced rising unemployment. This is a direct effect of "creative destruction". On the other hand, when it shorten the lifetime of the production units, and it will also shorten the return on investment of the production units, which hinder the establishment of new production units, lower vacancy positions unemployed workers to find work flow (ie, p (v) to reduce this rising unemployment, which is known as the indirect effect of "creative destruction".For the capitalization effect, in the model of quality ladder, the free condition of research and development is as follow: Formula 4D means the sunk costs for adjusted R & D productivity parameters and V means the instantaneous expected revenue for R & D, is the innovation Poisson arrival rate, r-g for the capitalization of the expected net income discount rate. When the growth rate increases, the net discount rate r-g decline, which means the net present value of innovation rise, and will stimulate research institutions to enter; when more research institutions entered into production units, the manufacture may provide more jobs for the society., thereby lowering the unemployment rate. This is the economic growths capitalization effect of the unemployment in the quality ladder model. In the model, when p '(v) is large, g is close to r, the capitalization effect plays a dominant role, when p' (v) is very small, "creative destruction" effect dominates.