Information Technology and the World Economy

1. Information Technology and the World Economy By Dale W. Jorgenson Harvard University http://post.economics.harvard.edu/faculty/jorgenson/ June 10, 2005

2. 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 WORLD GROWTH RESURGENCE: IT Investment and Productivity Growth ECONOMICS ON INTERNET TIME: The New Research Agenda

3. THE INFORMATION AGE:Faster, Better, Cheaper! MOORE'S LAW:The number of transistors on a chip doubles every 12-24 months. (Itanium 2 Processor, released November 8, 2004, has 592 million transistors.) INVENTION OF THE TRANSISTOR: Development of Semiconductor Technology. THE INTEGRATED CIRCUIT: Memory Chips; Logic Chips. SIA Annual Report 2005: In 1978, a commercial flight between New York and Paris cost $900 and took seven hours. If the principles of Moore's Law were applied to the airline industry, that flight would now cost about a penny and take less than one second.

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

5. HOLDING QUALITY CONSTANTMatched Models and Hedonics SEMICONDUCTOR PRICE INDEXES: Memory and Logic Chips. COMPUTER PRICE INDEXES: The BEA-IBM Collaboration. COMMUNICATIONS EQUIPMENT: Terminal, Switching, and Transmission. SOFTWARE: Prepackaged, Custom, and Own-Account.

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

7. 02 02 97 97 99 99 05 05 92 92 95 95 08 08 11 11 500 500 1992 NTRS 1992 NTRS 350 350 1994 NTRS 1994 NTRS 250 250 1997 NTRS 1997 NTRS 180 180 Pitch) Pitch) 1998 / 1999 ITRS 1998 / 1999 ITRS 130 130 Minimum Feature Size (nm) 2001/2003 ITRS* 100 100 (DRAM Half (DRAM Half International SEMATECH International SEMATECH 70 70 50 50 Area for Future ITRS Acceleration Area for Future Acceleration 35 35 25 25 02 02 97 97 99 99 05 05 92 92 95 95 11 11 08 08 *Note the 2003 ITRS timing is unchanged from the 2001 ITRS Semiconductor Roadmap Acceleration

8. 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

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

10. ROLE OF INFORMATION TECHNOLOGY:IT Prices and the Growth of Output. OUTPUT SHARES OF IT: Computers, Communications Equipment, and Software. OUTPUT CONTRIBUTION OF IT: IT versus Non-IT Value Added. OUTPUT CONTRIBUTION BY TYPE: Computers, Communications Equipment, and Software.

11. Output Shares of Information Technology by Type, 1948-2003 Computers Communications Software Total

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

13. Output Contribution of Information Technology Non-IT Consumption Non-IT Investment IT Output

14. Output Contribution of Information Technology Non-IT Consumption Non-IT Investment IT Output

15. ROLE OF INFORMATION TECHNOLOGY:IT Prices, Investment, and Productivity. INPUT SHARES OF IT: Computers, Communications Equipment, and Software. CAPITAL CONTRIBUTION: IT versus Non-IT Capital Services. CAPITAL CONTRIBUTION BY TYPE: Computers, Communications Equipment, and Software.

16. Input Shares of Information Technology by Type, 1948-2003 Computers Communications Equipment Software Total

17. Capital Input Contribution of Information Technology by Type Communications Software Computers

18. Capital Input Contribution of Information Technology Non-IT Capital Services IT Capital Services

24. WORLD GROWTH RESURGENCE: IT Investment and Productivity Growth. TOTAL FACTOR PRODUCTIVITY: IT-Production versus Non-IT Production. SOURCES OF ECONOMIC GROWTH: Capital Input, Labor Input, and TFP. LABOR INPUT GROWTH: Hours Worked and Labor Quality.

25. 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

27. Sources of Gross Domestic Product Growth Labor Input Non-IT Capital Input Non-IT Production IT Capital Input IT Production

33. ECONOMICS ON INTERNET TIME: The New Research Agenda. • 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. •  Modeling IT and the semiconductor industry: permanent versus transitory contributions to economic growth.