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Long Term Implications of the ICT Revolution: Applying the Lessons of Growth Theory and Growth Accounting

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  • Nicholas Oulton

Abstract

How big a boost to long run growth can countries expect from the ICT revolution? I use the results of growth accounting and the insights from a two-sector growth model to answer this question. The use of a two-sector rather than a one-sector model is required because of the very rapid rate at which the prices of ICT products have fallen in the past and are expected to fall in the future. According to the two-sector model, the main boost to growth comes from ICT use, not ICT production. Even a country which has zero ICT production can benefit via improving terms of trade. In the long run, the falling relative price of ICT products boosts the growth of GDP and consumption by inducing faster accumulation of ICT capital. I quantify this effect on the long run growth rate of 15 European and 4 non-European countries, using data from the EU KLEMS database. The ICT intensity of production (the ICT income share) is much lower in many European countries than it is in the United States or Sweden. Nevertheless the contribution to the long run growth of labour productivity stemming from even the current levels of ICT intensity is substantial: about half a percent per annum on average in the countries studied here. Eventually, the ICT revolution may diffuse more widely so ICT intensity may reach at least the same level as currently in the U.S. or Sweden, which would add a further 0.2 percentage points per annum to long run growth.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1027.

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Date of creation: Nov 2010
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Handle: RePEc:cep:cepdps:dp1027

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Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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Keywords: Potential output; productivity; ICT; two-sector model; growth accounting; termsof trade;

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Cited by:
  1. Crafts, Nicholas & O’Rourke, Kevin Hjortshøj, 2014. "Twentieth Century Growth*This research has received funding from the European Research Council under the European Union’s Seventh Framework Programme (FP7/2007-2013) / ERC grant agreement no. 249546," Handbook of Economic Growth, in: Handbook of Economic Growth, edition 1, volume 2, chapter 6, pages 263-346 Elsevier.
  2. Nicholas Oulton, 2010. "Long term implications of the ICT revolution: applying the lessons of growth theory and growth accounting," LSE Research Online Documents on Economics 49303, London School of Economics and Political Science, LSE Library.
  3. Nicholas Oulton, 2013. "Medium and long run prospects for UK growth in the aftermath of the financial crisis," Discussion Papers 1307, Centre for Macroeconomics (CFM).

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