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Openness, Technology Capital, and Development

Working Paper 651 | Published April 1, 2007

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Edward C. Prescott Senior Monetary Advisor (former)
Openness, Technology Capital, and Development


A framework is developed with what we call technology capital. A country is a measure of locations. Absent policy constraints, a firm owning a unit of technology capital can produce the composite output good using the unit of technology capital at as many locations as it chooses. But it can operate only one operation at a given location, so the number of locations is what constrains the number of units it operates using this unit of technology capital. If it has two units of technology capital, it can operate twice as many operations at every location. In this paper, aggregation is carried out and the aggregate production functions for the countries are derived. Our framework interacts well with the national accounts in the same way as does the neoclassical growth model. It also interacts well with the international accounts. There are constant returns to scale, and therefore no monopoly rents. Yet there are gains to being economically integrated. In the framework, a country’s openness is measured by the effect of its policies on the productivity of foreign operations. Our analysis indicates that there are large gains to this openness.

[Additional files]( "Additional files")
Published in: _Journal of Economic Theory_ (Vol. 144, No. 6, November 2009, pp. 2454-2476),
An updated version was published as [Staff Report 396]( "Staff Report 396")