Download The Importance of Information Technology: A Canada-U

Summary by: SEAN PANARAM
Summary of:
The Importance of Information Technology:
A Canada - U.S. Comparison.
By John R. Baldwin, Tarek M. Harchaoui and Faouzi Tarkhani
During the late 1990s, the Canadian economy performed very well. However, unlike previous phases in the
economy that also displayed persistent, strong growth, Canadians did not witness the usual increase in inflation.
This caused people to believe that there was something new about the economy. One notable difference between
the economy of previous years and now was that there was a huge increase in capital spending in new
information and communications technology (ICT). The article, “The Importance of Information Technology:
A Canada-U.S. Comparison” attempts to determine whether or not this investment in and application of new ICT
technology has been the cause for these structural shifts in the Canadian economy.
What is ICT and how is it calculated?
ICT can be found both in the outputs of those firms and industries that produce ICT goods, as well as in the
capital inputs into the production process of other firms and industries that use ICT. To obtain the data on ICT
expenditures in Canada, we turn to the Canadian System of National Accounts (CSNA). The CSNA, aside from
measuring GDP, also collects the data required to analyze the economic impact of ICT. The organization breaks
down ICT into three main categories:
 Computer hardware
 Computer software and,
 Telecommunications equipment.
For each of these ICT investment assets, the CSNA reports information on:
 The dollar value of expenditures (called nominal or current dollars),
 The price (called the price index or price deflator) and,
 The quantity of investment (called real, constant or chain-weighted dollars).
One problem that ICT goods pose over other commodities is that it is difficult to construct a consistent time
series of prices and real investments. This is because with each passing year, technologies improve at an
incredible rate. For example, a dollar spent today on computer hardware provides more computing power than a
dollar spent last year, so attempting to compare dollar expenditures on ICT alone would be quite misleading.
Instead, the CSNA uses “constant-quality price indexes” in an attempt to deal with this difficulty. “Constantquality price indexes” measure the price of a common set of productive characteristics over time and translates
observed nominal dollar expenditures into comparable estimates of real investment. This enables economists to
capture the enormous quality improvements that have taken place across successive generations of ICT assets.
The Behaviour of ICT Investment in Canada
Investment in ICT assets begun to decline in price and rapid growth was seen in real investment between 1981
and 2000. There was also a considerable decline in the quality-adjusted price of computer hardware over the
years. This drastic drop in the quality-price of computer hardware is made even more obvious when it is
compared to the GDP deflator –the price of business sector GDP output – which actually did the exact opposite
and rose instead of decreasing. This decline in the relative price of computers reflects the extent to which
technological progress in the production of computers surpassed technological progress in the production of
other commodities. The table below summarizes the exact figures as given in the article.
Time Period
1981-2000
Price of Computer Hardware
Decreased 15.4%
GDP Deflator
Reason for change (if stated)
1995-2000
Decreased 16.7%
Increased 6.6%
Increase in the production of computers over
production of other commodities.
Collectively, the three ICT assets (hardware, software, telecommunications) displayed a dramatic acceleration in
real ICT investment during the 1990s. The precise figures are listed in the table below as well as the business
sector GDP for comparison.
Real Investment in Computer Hardware
Real Investment in Software
Real Investment in Telecommunications
Business Sector GDP
Time Period: 1995-2000
28.8% increase
18.3% increase
6.0% increase
3.0% increase
There was also evidence that showed that the contribution of ICT equipment investment to total business sector
investment has been rising steadily over time. This is important because it directly determines the growth of
capital stock; basically, fast ICT equipment investment lead to an increase in the capital stock share of
equipment. These trends in the growth of the capital stock are major determinations of the growth of capital
services – the flow of services that are yielded by the investment in capital stock. One key observation was that
the growth of capital services was higher than the growth of capital stock. This is due to ongoing substitution of
short-lived equipment such as ICT equipment for long-lived structures such as buildings. The consequence is
that fast growing short-lived assets receive higher weight in capital service aggregation compared to their weight
for capital stock.
To further gain a better perspective of the impact of the stock of ICT capital on the Canadian economy, a direct
comparison can be made with the U.S. experience. The statistics collected by the U.S. Bureau of Labor
Statistics are listed in the table below along with the equivalent Canadian figures. Ultimately, the table shows
that Canada followed similar growth patterns to that of the U.S. if not at times, exceeding the U.S. growth. The
U.S. attributed its growth pattern to ICT and thus Canada has reason to as well.
Capital Services
(includes all assets)
(1981-1999)
Capital Services from
private sector business
investment
ICT Capital Investment
Services
Canada
United States
3.3% growth
3.8% growth
1981-1988: 3.5% growth
1988-1995: 2.6% growth
1995-1999: 4.2% growth
1981-1988: 21.5% growth
1988-1995: 17.5% growth
1995-1999: 25.7% growth
1981-1988: 3.9% growth
1988-1995: 2.8% growth
1995-1999: 5.3% growth
1981-1988: 14.5% growth
1988-1995: 8.5% growth
1995-1999: 17.5% growth
Reason / Notes
Similar growth, but slight
difference may be due to the
structural difference between
the two countries
Notice the similar growth
patterns (decline, then
increase)
Canada experienced much
faster growth
Impact of ICT on Productivity Growth
Despite all the support of ICT’s impact on the Canadian economy, the ultimate question of whether the growth
in ICT is also reflected in Canadian productivity still remains. There are three components of labour
productivity (output per hour) to consider when looking at productivity growth:
 capital deepening – the increase in capital available per worker. This is further broken down into the
following:
 the contribution of ICT equipment (accounts for largest percentage in both Canada and U.S.)
 the contribution of other machinery and equipment
 structures (includes inventories and land)
 changes in composition of the workforce – from increases in skills of workers
 “multifactor productivity” – everything that does not fit in the first two categories (ie. exploitation of
economies of scale, general improvements in knowledge, specific spillovers that allow more efficient plant
operations, etc.)
The table below from the article summaries the breakdown of the growth of labour productivity into these
components for Canada and the U.S.
The table basically shows the consistent growth in productivity experienced by both countries over the past few
years as verified by the table’s positive growth percentages for “Labour productivity growth.” One key
observation is that the “Information and Communication Technology” (ICT) portion of “Capital deepening”
experienced the highest growth when compared to the other two (“Other machinery and equipment” and
“Structures”). This just further verifies the positive impact of ICT on the total labour productivity. One final
note is that the acceleration in “Multifactor productivity” growth suggests:
 considerable improvements in the technology
 increases in the efficiency of production and,
 cyclical effects associated with the expansion phase.
Conclusion
It is clear from the evidence mentioned above that ICT investments have had a significant impact on the
Canadian business sector at an aggregated level as it did in the U.S. The two most obvious and observable
effects are:
 the increase in the rate of growth of ICT during the late 1990s and,
 its major contribution to the portion of capital deepening, which in turn, increased labour productivity.
There is also however, a third indirect effect: The multifactor productivity estimates increased dramatically at
the same time as ICT investments, which is consistent with the belief that ICT finally had its long-awaited
impact on the type of externalities and technological change that the multifactor productivity measures capture.
In the end, it is almost certain that as the price of computing power continues to decline, the rapid accumulation
of ICT will likely remain an important contributor to the growth in the overall output and productivity of the
Canadian business sector.