Macroeconomics, 2nd Edition by Pearson

ECONOMIC GROWTH

457

Let

S

i

be the index of skills or knowledge available to the firm.

47

Then, each

firm has a potential production function given by

Y

i

=

AK



i

(

S

i

L

i

)

1

-



(16.23)

Learning by doing occurs through each firm’s investment—an increase in a

firm’s capital stock leads to a parallel increase in its stock of knowledge,

S

i

.

This reflects the idea that knowledge and productivity gains come from invest-

ment and production. This articulation of how skills are acquired is motivated

by the empirical observation of the large positive effects of experience on pro-

ductivity in many production processes. ...