Information Technology and the World Economy

By

Dale W. Jorgenson

Harvard University

May 17, 2004

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.

Transistor Density on Micro Processors and Memory Chips

HOLDING QUALITY CONSTANTMatched 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, 1959-2002

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

Log

Scal

e (1

996=

1)

Computers Memory Logic

All price indexes are divided by the output price index.

95 97 99 02 05 08 11

1994 NTRS

1997 NTRS

1998 / 1999 ITRS

M

inim

um

Fe

atu

re S

ize

(n

m)

(D

RA

M H

alf

Pit

ch

)

500

350

250

180

130

100

70

50

35

25 95 97 99 02 05 08 11

92

92

1992 NTRS

2000 Plan

International SEMATECH

Area for Future Acceleration

Semiconductor Roadmap Acceleration

0

1

10

100

1,000

10,000

1959 1964 1969 1974 1979 1984 1989 1994 1999

Log

Scal

e (1

996=

1)

Computers Central Off ice Sw itching Equipment Prepackaged Softw are

All price indexes are divided by the output price index.Relative Prices of Computers, Communications, and Software, 1959-2002

Relative Prices of Computers, Communications, Software, and Services, 1948-2002

0

1

10

100

1,000

10,000

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998

Log

Sca

le (

1996

=1

)

Computers Communications Software Services

All price indexes are divided by the output price index.

ROLE OF INFORMATION TECHNOLOGY:IT Prices and the Growth of Output.

OUTPUT CONTRIBUTION BY TYPE:

Computers, Communications Equipment, Semiconductors, Software, and IT Services.

OUTPUT SHARES OF IT:

Computers, Communications Equipment, Semiconductors, Software, and IT Services.

OUTPUT CONTRIBUTION OF IT:

IT versus Non-IT Value Added.

Output Shares of Information Technology by Type, 1948-2002

0

1

2

3

4

5

6

7

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998

%

Computers Communications Software Services Total

Output Contribution of Information Technology by Type

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

1948-73 1973-89 1989-95 1995-02

Annu

al C

ontri

butio

n (%

)

Computers Communications Softw are Services

Note: Output contributions are the average annual grow th rates, w eighted by the output shares.

Chart 2.6: 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 1995-02

Non-IT Consumption IT Consumption Non-IT Investment IT Investment

Note: 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.

Input Shares of Information Technology by Type, 1948-2002

0

1

2

3

4

5

6

1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999

%

Computers Communications Equipment Software Total

Note: Share of current dollar gross domestic income.

Capital Input Contribution of Information Technology by Type

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 1995-02

An

nual

Co

ntr

ibu

tion

(%

)

Computers Communications Software

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

Capital Input Contribution of Information Technology

0.00

0.50

1.00

1.50

2.00

2.50

1948-73 1973-89 1989-95 1995-02

An

nual

Co

ntr

ibu

tion

(%

)

Non-IT Capital Services IT Capital Services

Note: 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

Capital Input Contribution by Country: Western Europe

-0.500

0.000

0.500

1.000

1.500

2.000

2.50019

89-1

995

1995

-200

1

1989

-199

5

1995

-200

1

1989

-199

5

1995

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1

1989

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5

1995

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1989

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1995

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1995

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1989

-199

5

1995

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1989

-199

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1995

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1989

-199

5

1995

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1

1989

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5

1995

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1

Austria Belgium Denmark Finland Greece Ireland Netherlands Norway Portugal Spain Sweden Switzerland

Non-IT IT

Capital Input Contribution by Country: Eastern Europe

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.019

89-1

995

1995

-200

1

1989

-199

5

1995

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1

1989

-199

5

1995

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1

1989

-199

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1

1989

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5

1995

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1

1989

-199

5

1995

-200

1

Bulgaria Czech Hungary Poland Romania Russia Slovakia Slovenia

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

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1948-73 1973-89 1989-95 1995-02

Annu

al C

ontri

butio

n (%

)

Non-IT Production IT Production

Note: Contributions are average annual relative price changes, w eighted by average nominal output shares.

Sources of Productivity 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

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 1995-02

Annu

al C

ontri

butio

n (%

)

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

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 Productivity IT Productivity

Sources of Economic Growth by Country: Western Europe

-2.00

0.00

2.00

4.00

6.00

8.00

10.0019

89-1

995

1995

-200

1

1989

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5

1995

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1989

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1995

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1

1989

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5

1995

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1

Austria Belgium Denmark Finland Greece Ireland Netherlands Norway Portugal Spain Sweden Switzerland

Labor Non-IT Capital IT Capital TFP

Sources of Economic Growth by Country: Eastern Europe

-10.00

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.0019

89-1

995

1995

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1

1989

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5

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1995

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1989

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5

1995

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1

1989

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5

1995

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1

Bulgaria Czech Hungary Poland Romania Russia Slovakia Slovenia

Labor Non-IT Capital IT Capital TFP

Sources of Average Labor Productivity Growth

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1948-73 1973-89 1989-95 1995-02

Annu

al C

ontri

butio

n (%

)

Labor Quality Non-IT Capital Deepening IT Capital Deepening Non-IT Production IT Production

Sources of Labor Productivity Growth by Country

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

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 Quality Non IT Capital Deepening IT Capital Deepening Non-IT Productivity IT Productivity

Sources of Labor Productivity Growth by Country: Western Europe

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.0019

89-1

995

1995

-200

1

1989

-199

5

1995

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1

1989

-199

5

1995

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1

1989

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1995

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1989

-199

5

1995

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1

1989

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5

1995

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1

Austria Belgium Denmark Finland Greece Ireland Netherlands Norway Portugal Spain Sweden Switzerland

Labor Quality Non-IT Capital Deepening IT Capital Deepening TFP

Sources of Labor Productivity Growth by Country: Eastern Europe

-8.00

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.0019

89-1

995

1995

-200

1

1989

-199

5

1995

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1

1989

-199

5

1995

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1

1989

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1995

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1995

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1989

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5

1995

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1

1989

-199

5

1995

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1

1989

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5

1995

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1

Bulgaria Czech Hungary Poland Romania Russia Slovakia Slovenia

Labor Quality Non-IT Capital Deepening IT Capital Deepening TFP

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.