Information Technology and the World Economy

By

Dale W. Jorgenson

Harvard University

http://post.economics.harvard.edu/faculty/jorgenson/

June 7, 2005

Economic Growth in the Information Age

INTRODUCTION:

Prices of Information Technology

THE INFORMATION AGE:

Faster, Better, Cheaper!

ROLE OF INFORMATION TECHNOLOGY:

IT Prices and the Cost of Capital

AMERICAN GROWTH RESURGENCE:

IT Investment and Productivity Growth

ECONOMICS ON INTERNET TIME:

The New Research Agenda

THE INFORMATION AGE:

Faster, Better, Cheaper!

MOORE'S LAW: The number of transistors on a chip doubles

every 18-24 months(Pentium 4, released November 20,2000,

has 42 million transistors).

MOORE (1998): "If the automobile industry advanced as

rapidly as the semiconductor industry, a Rolls Royce would

get half a million miles per gallon, and it would be cheaper to

throw it away than to park it."

INVENTION OF THE TRANSISTOR:

Development of Semiconductor Technology.

THE INTEGRATED CIRCUIT:

Memory Chips; Logic Chips.

Source: No Exponential is Forever, Gordon Moore ftp://download.intel.com/research/silicon/Gordon_Moore_ISSCC_021003.pdf

HOLDING QUALITY CONSTANT

Matched Models and Hedonics

SOFTWARE:

Prepackaged, Custom, and Own-Account.

SEMICONDUCTOR PRICE INDEXES:

Memory and Logic Chips.

COMPUTER PRICE INDEXES:

The BEA-IBM Collaboration.

COMMUNICATIONS EQUIPMENT:

Terminal, Switching, and Transmission.

Relative Prices of Computers and Semiconductors, 1959-2003 All price indexes are divided by the output price index

Computers Memory Logic

0.1

1.0

10.0

100.0

1,000.0

10,000.0

100,000.0

1959 1964 1969 1974 1979 1984 1989 1994 1999

Lo

g S

cale

(19

96

=1)

95 97 99 02 05 08 11

1994 NTRS

1997 NTRS

1998 / 1999 ITRS

Min

imu

m F

ea

ture

Siz

e (

nm

)

(DR

AM

Ha

lf

Pit

ch

)

500

350

250

180

130

100

70

50

35

25

95 97 99 02 05 08 11

92

92

1992 NTRS

International SEMATECH

Area for Future ITRS Acceleration

Semiconductor Roadmap Acceleration

95 97 99 02 05 08 11

1994 NTRS

1997 NTRS

1998 / 1999 ITRS

(DR

AM

Ha

lf

Pit

ch

)

500

350

250

180

130

100

70

50

35

25

95 97 99 02 05 08 11

92

92

1992 NTRS

International SEMATECH

Area for Future Acceleration

2001/

2003

ITRS*

*Note the 2003 ITRS timing is unchanged from the 2001 ITRS

Relative Prices of Computers, Communications and Software, 1959-2003 All price indexes are divided by the output price index

Computers Central Office Switching Equipment Prepackaged Software

0

1

10

100

1,000

10,000

1959 1964 1969 1974 1979 1984 1989 1994 1999

Lo

g S

ca

le (

19

96

=1

)

Computers Communications Software

Relative Prices of Computers, Communications and Software, 1948-2003 All price indexes are divided by the output price index

0

1

10

100

1,000

10,000

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Log S

cale

(1996=

1)

ROLE OF INFORMATION TECHNOLOGY:

IT Prices and the Growth of Output.

OUTPUT CONTRIBUTION BY TYPE:

Computers, Communications Equipment, and Software.

OUTPUT SHARES OF IT:

Computers, Communications Equipment, and Software.

OUTPUT CONTRIBUTION OF IT:

IT versus Non-IT Value Added.

Computers Communications Software Total

Output Shares of Information Technology by Type, 1948-2003

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

%

Share of current dollar gross domestic product.

Output Contribution of Information Technology by Type Output contributions are the average annual growth rates, weighted by the output shares.

Computers Communications Software

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Non-IT Consumption Non-IT Investment IT Output

Output Contribution of Information Technology

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1948-73 1973-89 1989-95 1995-03

An

nu

al C

on

trib

utio

n (

%)

Output contributions are the average annual growth rates, weighted by the output shares.

ROLE OF INFORMATION TECHNOLOGY:

IT Prices, Investment, and Productivity.

CAPITAL CONTRIBUTION BY TYPE:

Computers, Communications Equipment, and Software.

INPUT SHARES OF IT:

Computers, Communications Equipment, and Software.

CAPITAL CONTRIBUTION:

IT versus Non-IT Capital Services.

Computers Communications Equipment Software Total

Input Shares of Information Technology by Type, 1948-2003

0

1

2

3

4

5

6

1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999

%

Share of current dollar gross domestic income.

Capital Input Contribution of Information Technology by Type

Computers Communications Software

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Input contributions are the average annual growth rates, weighted by the income shares.

Non-IT Capital Services IT Capital Services

Capital Input Contribution of Information Technology

0.00

0.50

1.00

1.50

2.00

2.50

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Input contributions are the average annual growth rates, weighted by the income shares.

Capital Input Contribution by Country

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1980-

1989

1989-

1995

1995-

2001

1981-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

US Canada UK France Germany Italy Japan

Non-IT IT

AMERICAN GROWTH RESURGENCE:

IT Investment and Productivity Growth.

AVERAGE LABOR PRODUCTIVITY GROWTH:

Capital Deepening, Labor Quality, TFP.

TOTAL FACTOR PRODUCTIVITY:

IT-Production versus Non-IT Production.

SOURCES OF U.S. ECONOMIC GROWTH:

Capital Input, Labor Input, and TFP.

Contributions of Information Technology to Total Factor Productivity Growth

Contributions are average annual relative price changes, weighted by average nominal output shares.

Non-IT Production IT Production

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Sources of TFP Growth by Country

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

1980-

1989

1989-

1995

1995-

2001

1981-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

US Canada UK France Germany Italy Japan

Non-IT IT

Sources of Gross Domestic Product Growth

Labor Input Non-IT Capital Input IT Capital Input Non-IT Production IT Production

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Sources of Economic Growth by Country

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

1980-

1989

1989-

1995

1995-

2001

1981-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

US Canada UK France Germany Italy Japan

Labor Non-IT Capital IT Capital Non-IT Total Factor Productivity IT Total Factor Productivity

Sources of Average Labor Productivity Growth

Labor Quality Non-IT Capital Deepening IT Capital Deepening Non-IT TFP IT TFP

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1948-73 1973-89 1989-95 1995-03

An

nu

al

Co

ntr

ibu

tio

n (

%)

Sources of Labor Productivity Growth by Country

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1980-

1989

1989-

1995

1995-

2001

1981-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

1980-

1989

1989-

1995

1995-

2001

US Canada UK France Germany Italy Japan

An

nu

al

Co

ntr

ibu

tio

n (

%)

Labor Quality Non IT Capital Deepening IT Capital Deepening Non-IT Total Factor Productivity IT Total Factor Productivity

ECONOMICS ON INTERNET TIME:

The New Research Agenda.

• Modeling IT and the semiconductor industry: permanent

versus transitory contributions to economic growth.

•The Solow Paradox -- we see computers everywhere but in

the productivity statistics -- versus the Information Age.

•Equity Valuations and Growth Prospects: accumulation of

intangible assets versus irrational exuberance.

•Widening Wage Inequality:capital-skill complementarity

versus skill-biased technical change.