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AGGREGATE EXPENDITURES LINE: A line representing the relation between aggregate expenditures and gross domestic product used in the Keynesian cross. The aggregate expenditure line is obtained by adding investment expenditures, government purchases, and net exports to the consumption line. As such, the slope of the aggregate expenditure line is largely based on the slope of the consumption line (which is the marginal propensity to consume), with adjustments coming from the marginal propensity to invest, the marginal propensity for government purchases, and the marginal propensity to import. The intersection of the aggregate expenditures line and the 45-degree line identifies the equilibrium level of output in the Keynesian cross.

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TECHNOLOGY, AGGREGATE SUPPLY DETERMINANT:

One of several specific aggregate supply determinants assumed constant when the short-run and long-run aggregate supply curves are constructed, and that shifts both aggregate supply curves when it changes. An increase in technology causes an increase (rightward shift) of both aggregate supply curves. A decrease in technology causes a decrease (leftward shift) of both aggregate supply curves. Other notable aggregate supply determinants include wages, energy prices, and the capital stock. Technology comes under the resource quality aggregate supply determinant.
Technology is the information and knowledge the economy has concerning production techniques and methods of combining scarce resources in the production of goods and services. While the term technology is often used in reference to the LATEST production techniques (especially when computers are involved), it actually refers to all techniques.

Throughout most of history, technology has advanced forward. Through scientific research, production experience, and just plain learning-by-doing, society tends to know more today than yesterday. Technology advances. Of course technology can decline, such as what happened during the European medieval ages, but this is highly unusual.

An advance in technology makes it possible to produce more output with a given quantity of resources or to produce the same quantity of output with fewer resources, hence causing an increase in both long-run and short-run aggregate supply. A less common decline in technology means producing less output with a given quantity of resources or to produce the same quantity of output with more resources, hence causing a decrease in both long-run and short-run aggregate supply.

Shifting the SRAS Curve
Shifting the SRAS Curve
Shifting the LRAS Curve
Shifting the LRAS Curve

Consider a pair of typical aggregate supply curves, both long-run and short run, such as those displayed in the exhibit to the right. The exhibit displays a positively-sloped short-run aggregate supply curve in the top panel and a vertical long-run aggregate supply curve in the bottom panel. Like all aggregate supply curves, these are constructed based on several ceteris paribus aggregate supply determinants, such as technology. The key question is: What happens to these aggregate supply curves if technology changes?

Advancing Technology

Suppose, for example, major breakthroughs in computer technology, much like those transpiring during the 1980s and 1990s, enhance the productive capabilities of virtually every industry in the economy. This advance in technology leads to an increase in aggregate supply, both short run and long run, causing both SRAS and LRAS curves to shift rightward. Note that the increase in technology means a larger quantity of real production is supplied at the same price level, which means an increase in aggregate supply.

To see how better technology affects the aggregate supply curves, click the [Advancing Technology] button. The advance in technology triggers an increase in aggregate supply and a rightward shift of both the short-run and long-run aggregate supply curves.

Declining Technology

Alternatively, suppose that the economy somehow loses a portion of its technological know how. A decline in technology is much less common in the modern economy than advancing technology, but it can happen. Suppose, for example, that a particularly viscous computer virus rapidly spreads throughout the economy, destroying a large portion of valuable digitally stored information.

This decline in technology leads to a decrease in aggregate supply, both short run and long run, causing both SRAS and LRAS curves to shift leftward. Note again that the decrease in technology means a smaller quantity of real production is supplied at the same price level, which means a decrease in aggregate supply.

To see how a drop off in technology affects the aggregate supply curves, click the [Declining Technology] button. The decline in technology triggers a decrease in aggregate supply and a leftward shift of both the short-run and long-run aggregate supply curves.

What Does It Mean?

The importance of technology as an aggregate supply determinant is particularly important for the long run expansion of the economy. Technological advance has been one of the key reasons, if not THE key reason, that the modern economy has achieved current, historically unprecedented, living standards. The advent over the past two hundred years, of automobiles, pharmaceuticals, electric light bulbs, computers, airplanes, telephones, lasers, and other products on a lengthy list way too long to present here, have played an enormous part in making lives healthy, wealthy, and comfortable.

This technological march that shifts the short-run and long-run aggregate supply curves tends to be subtle and more often than not overwhelmed by business-cycle-inducing shifts of the aggregate demand curve. While it is easy to look back a few decades to note the pace of progress, changes are often overlooked as they occur, or if not, the changes are merely taken for granted.

However, technological progress is not a given. Someone must make the effort needed to create new products and make them available to the public. If these folks are not compensated for their efforts, then they have no incentive to perform their innovative activities and technological progress ceases.

<= TECHNOLOGYTERMS OF TRADE =>


Recommended Citation:

TECHNOLOGY, AGGREGATE SUPPLY DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: April 24, 2014].


Check Out These Related Terms...

     | resource quantity, aggregate supply determinant | resource price, aggregate supply determinant | resource quality, aggregate supply determinant | wages, aggregate supply determinant | energy prices, aggregate supply determinant | aggregate supply determinants | aggregate supply shifts | change in aggregate supply | change in real production | slope, aggregate supply curve | capital stock, aggregate supply determinant | aggregate demand determinants |


Or For A Little Background...

     | aggregate supply | short-run aggregate supply | long-run aggregate supply | short-run aggregate supply curve | long-run aggregate supply curve | gross domestic product | price level | real production | GDP price deflator | real gross domestic product | production cost | economic growth | technology |


And For Further Study...

     | AS-AD analysis | aggregate market | business cycles | circular flow | Keynesian economics | monetary economics | flexible prices | inflexible prices | short-run aggregate supply and market supply | aggregate market shocks | economic growth, production possibilities |


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