Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Has the Surge in Computer Spending Fundamentally Changed the Economy?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Has the Surge in Computer Spending Fundamentally Changed the Economy?

Article excerpt

The computer sector has been one of the fastest growing segments of the U.S. economy over the past two decades. Computers appear to be everywhere-on the desks of executives, on the factory floor, in the classroom, at home, and, these days, even in people's pockets. By all accounts, computers appear to be rapidly changing the way many of us conduct business, recreate, and communicate. The proliferation of computers has made the world seem much smaller, as computer related innovations, such as the Internet, let individuals on opposite sides of the world interact in ways that were unimagined 20 years ago. As a result, spending on computers has exploded.

The dynamic nature of the computer sector and the sector's increased prominence in overall spending in the economy have led some analysts to suggest that the economy is entering a New Era, where the economy will return to the highgrowth, low-inflation conditions of the 1950s and 1960s.1 Although spending on computers is spread throughout all sectors of the economy, the key channel through which the economy might be transformed is investment spending on computers by businesses. Spending on computers by businesses is key because the contribution of computers to output growth depends crucially on the quantity of computers used in the production process. If rapid spending on computers does lead to faster output growth, then understanding the magnitude of the contribution of computer capital to output growth will be crucial for long-run forecasting and policy analysis.

This article examines whether computers have fundamentally changed the economy. The first section documents the developments in the computer sector that have led many analysts to suggest that a computer-led surge in output growth is under way. In particular, it focuses on the rapid increases in investment spending on computing equipment by businesses and the importance of these increases for increases in overall investment spending. The second section uses a standard framework to show that the resulting growth in the capital stock of computing equipment has made only a modest contribution to output growth to date. Relaxing the assumptions underlying the standard framework, however, shows that the contribution of computers to output growth appears to have been somewhat larger. The third section discusses whether computers might generate a larger pickup in output growth in the future. The article concludes that computers have had only a modest impact on output growth until now, but the future impact could be larger.

I. THE SURGE IN COMPUTER SPENDING

The casual observation that computers seem to be everywhere is borne out by spending data. Spending on computers has been growing rapidly in all sectors of the economy.

How are computers defined in the National Income and Product Accounts?

Computers appear as a detailed category in most of the major components of GDP. The National Income and Product Accounts consist of six major components. These components are personal consumption expenditures, business fixed investment, residential fixed investment, government expenditures, net exports, and inventory investment. Each of these components can be divided into finer levels of detail. For example, the business fixed investment component of GDP consists of two major subcomponents, structures and producers' durable equipment, which themselves can be divided into finer levels of detail. The second column of Table 1 describes where computers appear in the NIPA accounts. For example, in the personal consumption expenditures component of GDP, computers appear as a detailed category within consumer durable goods.

Each major component of the NIPA accounts defines the computer sector somewhat differently. The third column of Table 1 lists how computers are defined in each of the major components of GDP. For personal consumption expenditures and net exports, computers include hardware and software. …

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