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IT and the US Economy

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Benjamin Tan

on 28 April 2010

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Transcript of IT and the US Economy

I.T. and the U.S. Economy 1. History of U.S. Economic Growth 2. Semiconductors and Productivity Semiconductor prices fall Semiconductors are broadly used in computing and communications equipment.
(All modern electronics make use of semiconductors - aircrafts, cars, etc.) Electronics components price fall Computer equipment and various IT prices fall Effect on economy
1) Able to invest in more IT or to divert investment to other needs
2) Productivity increases as computers get cheaper
Note that computers themselves are not nessesarily getting cheaper but that
price per quality is decreasing as technology develops
(i.e. more powerful computers at the same price) Moore's Law The number of transistors on a chip (of unit area) roughly doubles every 18-24 months.
Exponential growth of 35-45% per year! Semiconductor Prices Relative Prices of Computers
and Semiconductors 3. Falling IT Prices
At the same time, Prices arent doubling at the same rate.
So constant quality prices are decreasing Other Prices Computer prices are falling - but much less rapidly than semiconductors
(Semiconductors account for less than a computers costs) Communications equipment prices are also falling - at about the same pace as computer prices Software prices have also been on a steady decline (10% per year)
(however, only prepackaged software can be controled for quality;
custom software is not accurately accounted for) Relative Prices of Computers,
Communications, Software
and Services GDP growth from 1948 to 1999 averaged 3.46% 4. Setting up the model Just like our standard growth accounting exercise we want to attribute output growth to
A = Total Factor productivity
K = Capital
L = Labour Jorgenson argues that the original model where capital is measured as capital stock and labour is measured as labour hours is no longer adequate.

Instead we should look at capital services as a measure of capital and labour input as a measure of labour

(Difference between capital services and capital stock = increase in capital quality)
(Difference between labour input and labour hours = increase in captital quality) Instead of the aggregate production function (which cannot take into account seperate prices
of investment and consumption goods; nor incorporate costs of adjustment) - we consider a
Production Possibilities Frontier The Production Possibilites Frontier In = Non IT-Investment
Ic = I in Computers
Is = I in Software
It = I in Communications Equipment
Cn = non-IT consumption goods and services
Cc = IT capital services to households and Govt Kn = Non-IT capital services
Kc = services of computers
Ks = services of software
Kt = telecommunications equipment
L = Labour input Outputs = A * Inputs Or in its fuller form: Under the assumption that product and factor markets are competitive, producer equilirbium implies that the share-weighted output growth is the sume of the share-weighted input growth and growth in TFP 5. Results Note how the contribution of IT is steadily increasing While the contribution of Non-IT is decreasing Output Contribution of IT Output contribution of IT to growth by Type Worth noting that while computer prices have
dropped the fastest - investment in software has increased as much as investment in computers

Reason could be that cheaper comptuers lead firms to invest in compliments such as software

Alternatively, the price indices used to deflate software fails to hold quality constant - (e.g. more custom software? opensource software?) The dark purple - IT investment is steadily increasing over the 50 years making up for a larger and larger proportion of the growth. Capital input contribution of IT The contribution of inputs is even higher than we saw in the outputs Capital Input contribution of IT by Type Contributions of IT Investment Spillover Effect: Technology makes us productive The development of the IT industry as shown has increased economic growth greatly.
However - the product of this development, i.e. comptuers, communications equipment
and software have productivity enhancing effects when employed in the economy Thus, IT production also increases TFP growth
(Spillover from IT-Producing industry to IT-Using industries) IT Contribution to TFP 6. Conclusions The rate of productivity growth is measured as the decline in the price of output
plus a weighted average of the growth rates of input prices.

For the computer industry there are two terms: the decline in the price of computers
and the contribution of the price of semi conductors. The solow paradox is no longer a paradox - computers now do show up in the productivity statistics Capital and labour markets have been severely impacted by IT development
Labour markets in aprticular have seen widening wage differentals
between the more and less educated workers.

IT is also altering product markets and business organizations;
However there is no satisfactory model yet developed to assess its full impact

The relentless decline in the prices of IT equipment has steadily enhanced the role of IT investment as a source of American economic growth.

In particular, much of the growth resurgence in the 1990's can be attributed to either increased investment in IT, or the spillover effect of increased productivity from TFP growth and capital deepening 7. And then some more... The growth and productivity boom of the 90's lasted until the around 2004.
Since then productivity growth has declined from just under 3% to about 1.2% (2004-2007)

It seems that the falling IT prices of the 90's were a positive supply sock, as opposed to a
fundamental shift in the nature of the economy.

"information technology appears much less important after 2000, as both the contribution
from the production and use of information technology have receeded from the phenominal rates observed in the lats 1990's" - Jorgenson 2008

Nonetheless there is a strong case that the effects of IT on economic growth are real and sustainable Introduction This paper attempts to perform a growth accounting analysis to determine how much of the 90's growth resurgence can be attributed to IT development Structure

1.Recent History of US economic growth
2. Semiconductors and productivity
3. Motivation - Falling IT prices
4. Setting up the model
5. Results of the model
6. Conclusions In the post war period (50's and 60's) productivity growth was high
However, starting in the early 70's and continuing tinto the 80's, productivity growthand economic growth slowed down dramatically
(result of oil supply shocks)

It was infamously noted around the time that "computers are seen everwhere but in the productivity statistics"

20 years later - In the 90's we get a resurgence of growth and growth productivity

This paper breaks down the growth of the 90's and argues that it can be explained by the rapid decline in prices of semiconductors and computer prices DW Jorgenson Presentation by Benjamin Tan and Duc Phung
Full transcript