Download Innovation, Productivity and Welfare

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
1
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
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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
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Real Production versus Real expenditure
Figure 1: Measures of Real GDP
q2
P1
C
P2
P3
D
U
B'
A
0
B
P1
P3
P2
q1
4
Decomposing real GDP growth
 GDP (net output) function : Kohli (1990); Diewert
and Morrison (1986). Follow Kohli (2004)
 ( P F , P X , P M , L, K , t )
  max P F F  P X X  P M M : ( F , X , M , L, K , t )  Tt
F , X ,M

 ln Q   ln Y  v X  ln P X  v M  ln P M 
v L  ln L  v K  ln K   ln A  v X  ln P X  v M  ln P M


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
5
Prices and Real GDP in Finland
1.5
Index (1995 =1 )
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
PX
PI
PF
X
Q
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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
 ln A  
PjL L j  PjK K j
Y
P Y
j
 ln P X  
j
PjX X j
PX X
 ln A j
 ln PjX
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PjF  PjX  PjY
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.
PjF  PjX  PjY
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Finland, Contribution to real income
(%-points), 1995-2004
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
2000-2004
1995-2000
Capital
MFP non
P export non
Labour
P import
MFP ICT
P export ICT
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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:
h j F j1 , F j 2 .., F jn , E j1 , E j 2 .., E jn , M j1 , M j 2 .., M jn  
g j L j , K j , X 1 j , X 2 j ,.., X nj , M 1 j , M 2 j ,.., M nj , t 
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Sectoral frontiers
F
E
X
w

ln
F

w

ln
E

w
 ij
 ij
 ji  ln X ji 
ij
ij
i
i
i
v jL  ln L j  v jK  ln K j   vijX  ln X ij   vijM  ln M ij   ln A j
i
wijF 
v 
L
j
PijF Fij
PjY Y j
Pi L L j
Y
j
P Yj
i
F
E
X
w

w

w
 ij  ij  ji  1
i
i
i
v Lj  v Kj   vijX   vijM  1
i
i
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Aggregation


P Y Y    PjL L j  PjK K j   PijM M ij 
j 
i



 ln Y   w jY   wijF  ln Fij   wijE  ln Eij 
j
i
 i

 L

K
M
  w  v j  ln L j  v j  ln K j   vij  ln M ij   ln A j 
j
i


Y
j
wYj 
PjY Y j
PY Y
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Decomposition of growth in real
expenditure F
 v jL  ln L j  v jK  ln K j 



 1 
 ln F   F   w jY 
M
E

v

ln
M


ln
A

w

ln
E


ij
ij
j
ij
ij
w  j


i
 i

Advantages above GDP approach:
More general definition of technology
 Industry deliveries to real expenditure
rather than to real income
 Role of prices?
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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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