Lecture 4. SOURCES OF GROWTH Economics 1490 THE WORLD ECONOMY: GROWTH OR STAGNATION? with Professor Dale W. Jorgenson Lecture 4. SOURCES OF GROWTH September 12, 2017 Harvard University Department of Economics Fall 2017

THE WORLD ECONOMY: GROWTH OR STAGNATION? A. Comparing Economies B. U.S. Crisis and Recovery C. European Slowdown D. Asian Economic Miracles E. Sustainability of Economic Growth F. World Economic Outlook

A. COMPARING ECONOMIES 1. Course Description 2. The World Economy since 1990 3. Purchasing Power Parities 4. Sources of Growth 5. Globalization and Competitiveness

THE SOURCES OF ECONOMIC GROWTH Comparisons among Regions and Countries Sources of Growth in Capital Input Information Technology and Non-Information Technology Labor Input and Labor Quality Total Factor Productivity

MODEL OF PRODUCTION: Production Possibility Frontier. where: I - Investment C – Consumption K – Capital L – Labor A - Total Factor Productivity (TFP)

SOURCES OF WORLD ECONOMIC GROWTH Average annual growth rates, weighted by the income share.

THE INFORMATION AGE: Faster, Better, Cheaper! 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. MOORE'S LAW: The number of transistors on a chip doubles every 18-24 months (Itanium processor 9300, formerly code-named Tukwila, was released on February 8, 2010, and has four cores and two billion transistors).

IF TRANSISTORS WERE PEOPLE

MOORE'S LAW AND THE FUTURE OF COMPUTING Optional reading: Byrne, David, Steven Oliner, and Dan Sichel. 2015. "How Fast Are Semiconductor Prices Falling?" NBER Working Paper No. 21074, Cambridge, MA, NBER, April 2015. See: http://www.nber.org/papers/w21074 Hennessey, John L., and David A. Patterson. 2013. Computer Organization and Design, 5th ed. Waltham, MA: Morgan Kaufmann. http://www.amazon.com/Computer-Organization-Design-Fifth-Edition/dp/0124077269 Markoff, John. 2015. "IBM Scientists Find a New Way to Shrink Semiconductors," New York Times, October 1, 2015. See: http://www.nytimes.com/2004/05/17/business/technology-intel-s-big-shift-after-hitting-technical-wall.html?pagewanted=print&src=pm

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

CAPITAL INPUT AS A SOURCE OF GROWTH INPUT SHARES OF IT: Computers, Communications Equipment, and Software. CAPITAL CONTRIBUTION: IT vs. Non-IT Capital Services. CAPITAL CONTRIBUTION BY TYPE:

CONTRIBUTION OF CAPITAL TO WORLD GROWTH

CONTRIBUTION OF CAPITAL INPUT TO WORLD GROWTH

CONTRIBUTION OF CAPITAL INPUT TO G7 GROWTH

CONTRIBUTION OF CAPITAL INPUT TO EMERGING ECONOMY GROWTH

WORLD ECONOMIC GROWTH Output: World Economy, G7 Economies, Emerging Economies Capital Input: Information Technology Versus Non-Information Technology Labor Input: Hours Worked Versus Labor Quality Total Factor Productivity

SOURCES OF WORLD ECONOMIC GROWTH Annual percentage growth rates

SOURCES OF G7 ECONOMIC GROWTH Annual percentage growth rates

SOURCES OF EMERGING ECONOMY GROWTH Annual percentage growth rates

SOURCES OF ECONOMIC GROWTH: SUMMARY Basic Concepts: Output, Input, and Productivity. Comparisons among Regions and Countries The Role of Information Technology Capital Input, Labor Input, and Productivity Relative Importance of Investment and Productivity

STRUCTURAL CHANGE IN ADVANCED ECONOMIES Traditional Approach: Agriculture, Manufacturing, and Services New Approach to Manufacturing: IT versus Non-IT Production New Approach to Services: Market versus Non-Market Services Market Services: Distribution, Finance and Business, Personal

DESCRIPTION OF SECTORS

text PRODUCTIVITY

OUTPUT PRICES

LABOR SHARE

HIGH-SKILLED LABOR SHARE

IT CAPITAL SHARE

STRUCTURAL CHANGE: SUMMARY Multi-Factor or Total Factor Productivity Evolution of Output Prices Compensation of Labor and High-Skilled Workers Compensation of IT Capital Input