Innovation, Productivity and Welfare

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• 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
•  

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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
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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

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Prices and Real GDP in Finland
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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

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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.

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

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Sectoral frontiers
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Aggregation
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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?

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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?