GROWTH AND CRISIS IN THE European Competitiveness Economics 1490 GROWTH AND CRISIS IN THE WORLD ECONOMY with Professor Dale W. Jorgenson Lecture 12: October 11, 2016 European Competitiveness Harvard University Department of Economics - Fall 2016

European Competitiveness THE WORLD ECONOMY: GROWTH AND CRISIS Lecture 12: October 11, 2016 European Competitiveness THE WORLD ECONOMY: GROWTH AND CRISIS Comparing Economies across the World and over Time. 2. The Great Debate over the Financial and Economic Crisis. 3. The European Slowdown and the Crisis in Europe. 4. Asian Economic Miracles: Will They Continue? 5. Sustainability of Economic Growth. 6. World Economic Outlook.

European Competitiveness THE EUROPEAN SLOWDOWN AND CRISIS IN EUROPE Lecture 12: October 11, 2016 European Competitiveness THE EUROPEAN SLOWDOWN AND CRISIS IN EUROPE 11. U.S. Growth Resurgence and European Slowdown. 12. European Competitiveness. 13. Europe 2020 and the Single Market. 14. European Policy Response: The Euro. 15. European Policy Response: Brexit

European Competitiveness THE EUROPEAN FINANCIAL AND ECONOMIC CRISIS Lecture 12: October 11, 2016 European Competitiveness THE EUROPEAN FINANCIAL AND ECONOMIC CRISIS The economic and financial crisis which started in 2008/09 has thrown the European economy into a “double-dip” recession and overall stagnant growth for a lengthy period of time, in terms of significantly slower growth, a decline in employment, and a negative growth rate in total factor productivity. However, the perils which the crisis inflicted on the European economy can by no means be seen independently from the pre-crisis period. Well before the crisis hit, most European countries exhibited a significant slowdown in their long-term trend growth, driven primarily by slowing productivity growth especially in the “original” EU-15 economies and the Euro Area. Bart van Ark and Mary O’Mahony.

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Investment Intensity of Intangible Assets as a % of value added in the market sector, EU15 and the US, 1995-2010 2a: European Union-15*

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Investment Intensity of Intangible Assets as a % of value added in the market sector, EU15 and the US, 1995-2010 2b: United States Note: computerized information includes software and databases, innovative property includes scientific R&D, mineral exploration, entertain and artistic originals, other new product developments (e.g. design and financial innovations), and economic competencies includes workforce training, improvements in organizational structures, and brands and reputation (incl. market research and advertising). EU-15* refers to pre-2004 membership of EU Source: Corrado, Haskel, Jonas-Lasinio and Iommi (2013). Intan-Invest project

INFORMATION TECHNOLOGY AND THE KNOWLEDGE ECONOMY Lecture 12: October 11, 2016 European Competitiveness INFORMATION TECHNOLOGY AND THE KNOWLEDGE ECONOMY Investment in Information Technology Is One of the Key Elements of the Knowledge Economy. The Rapid Development of the Knowledge Economy Was an Important Source of the American Economic Resurgence. The Slowdown in European Economic Growth Can Be Attributed to Europe’s Failure to Develop a Knowledge Economy.

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness CAPITAL INPUT AND THE COST OF CAPITAL PERPETUAL INVENTORY METHOD where: K - capital stock I – investment  - depreciation rate RENTAL PRICE OF CAPITAL INPUT   where:   c - price of capital input P - price of investment r - rate of return  - asset-specific inflation rate

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Contribution of Information Technology to U.S. Capital Input Growth Average annual growth rates, weighted by the income share.

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness World Capital Input Contribution of Information Technology Annual percentage growth rates, weighted by income shares Annual Contribution (%)

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness G7 Capital Input Contribution of Information Technology Annual percentage growth rates, weighted by income shares Annual Contribution (%)

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Non-G7 Capital Input Contribution of Information Technology Annual percentage growth rates, weighted by income shares Annual Contribution (%)

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness INVESTMENT IN INFORMATION TECHNOLOGY: SUMMARY Information Technology Has Developed Very Rapidly Since the Invention of the Transistor in 1947, the Integrated Circuit in 1958, and the Microprocessor in 1971. This is Captured by Moore's Law, Doubling the Number of Transistors on a Chip Every 18-24 Months. The Economics of Information Technology is Captured by IT Prices, Which Have Declined Very Rapidly Since the Commercialization of the Electronic Computer in 1959 (18 Percent Per Year for Computers; 40 Percent Per Year for Logic Chips). However,the Improvement of Computing Performance has Slowed Drastically Since 2004. The Impact of Information Technology Depends on the Growth of Capital Stocks and Their Rental Prices. Until Recently Economists Have Used Asset Prices to Try to Represent This, But This Underestimates the Impact of IT Investment by a Factor of 7.5!

European Competitiveness PATTERNS OF WORLD TRADE Lecture 12: October 11, 2016 European Competitiveness PATTERNS OF WORLD TRADE   The Value Added Approach to Trade Shifting Patterns of World Trade Inward and Outward Foreign Direct Investment

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness EUROPEAN COMPETITIVENESS Lecture 12: October 11, 2016 European Competitiveness EUROPEAN COMPETITIVENESS   International Fragmentation of Production Regional Shares of Global Manufacturing Revealed Comparative Advantage of the EU27

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Value added and workers involved in production of German transport equipment

European Competitiveness International fragmentation of production Lecture 12: October 11, 2016 European Competitiveness International fragmentation of production

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Regional shares in world GVC income for all manufactures (%)

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Revealed comparative advantage of EU27, by group of final manufactures (%)

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness Change in employment versus change in real wage in manufacturing GVCs, 1995-2008 (1995=1).

European Competitiveness Lecture 12: October 11, 2016 European Competitiveness

European Competitiveness COMPARATIVE ADVANTAGE AND COMPETITIVENESS Lecture 12: October 11, 2016 European Competitiveness COMPARATIVE ADVANTAGE AND COMPETITIVENESS  Global Value Chains and Patterns of World Trade   Revealed Comparative Advantage European Competitiveness and the Knowledge Economy