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Innovation, Productivity and Welfare - Marcel Timmer Groningen Growth and Development Centre

Innovation, Productivity and Welfare - Marcel Timmer Groningen Growth and Development Centre University of Groningen Presentation for t he 2008 World Congress on NAEP Measures for Nations. Motivation. Imagine a small open economy with two sectors:

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Innovation, Productivity and Welfare - Marcel Timmer Groningen Growth and Development Centre

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  1. Innovation, Productivity and Welfare - Marcel Timmer Groningen Growth and Development Centre University of Groningen Presentation for the 2008 World Congress on NAEP Measures for Nations

  2. Motivation • Imagine a small open economy with two sectors: • Stagnant services sector (producing for domestic demand) • Dynamic Telecommunication equipment manufacturing (mainly for export) • Do workers gain in welfare when productivity growth is high in telecom? • Innovation can have two counteracting effects on welfare • Improve productivity • Declining terms-of-trade

  3. This paper • Trace the contributions of individual sectors to overall real income growth • Productivity growth in a sector will contribute positively, but part of gains might spillover to foreigners. This will depend on share of exports and on terms-of-trade (price exports over price imports). • Use two approaches: • GDP function approach (Kohli, Diewert) • Production possibility approach (Gollop) • Empirical application to Finnish economy

  4. Real Production versus Real expenditure

  5. Decomposing real GDP growth • GDP (net output) function : Kohli (1990); Diewert and Morrison (1986). Follow Kohli (2004) • Q (real income) is nominal GDP divided by price of domestic expenditure, while Y is nominal GDP with X and M deflated seperately (real production). • NB Prices of exports and imports relative to price dom exp

  6. Prices and Real GDP in Finland

  7. Sectoral contributions • Breakdown aggregates into sectoral contributions (in the spirit, but not equal to Diewert, 2008): • Define aggregate technical change (A) and Export prices as Tornqvist volume aggregation of sectors

  8. Data • Need value added, labour, capital and MFP (technical change) by industry • EU KLEMS database (www.euklems.com) • Need export values and prices by industry • Not available. Use Input-output table to divide industry output into X and F (from Eurostat IO-database) • Assume price of industry output is the same for all uses.

  9. Finland, Contribution to real income (%-points), 1995-2004

  10. Alternative approach • Net output approach ignores role of intermediate inputs. Technical change only affects K and L. • Following Gollop (1982), our model of an open economy is set up by defining sectoral production possibility frontiers for each sector j as follows:

  11. Sectoral frontiers

  12. Aggregation

  13. Decomposition of growth in real expenditure F • Advantages above GDP approach: • More general definition of technology • Industry deliveries to real expenditure rather than to real income • Role of prices?

  14. Concluding remarks • Advantages of production possibilities frontier approach above GDP approach: • More general definition of technology • Industry deliveries to real expenditure rather than to real income • Innovation gains can spill over internationally • Decomposition is silent on causality: Why do export and import prices change?

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