True Investment-GDP Ratio in a World Economy with Investment in Information & Communication Technology

The nominal investment-GDP ratio is playing a key role in the economic debate in the US and in the EU. However, this analysis is largely misleading as a rising share of overall investment is in the form of ICT investment: The price of ICT investment goods has been falling for decades so that it is adequate to consider the “real effective” investment-GDP ratio calculated on the basis of real ICT investment relative to real GDP. The gap between the two ratios is about 3-6 percentage points for the USA and Germany, and indeed some other EU countries, so that effective investment-GDP ratios in both the United States and Germany are seriously underestimated if nominal-GDP ratios are used – as the DIW, Berlin, did for Germany and other EU countries. There are, of course, critical implications for the debate about how large the investment gap is in Germany, France, Italy, Spain and other countries; this analysis is also highly relevant for the issue of overcoming slow growth and high unemployment rates. As regards Germany, there is only a small private investment gap, while that gap is much larger in Italy and Spain – judging by the real effective investment ratio of 2007 compared to the previous periods. In countries where the real effective investment-output ratio is quite different from the nominal investment-GDP ratio, the implication is that the savings rate and the current account position in the uses side of GDP in the System of National Accounts also need to be recalculated. The IMF should take the new methodology into account for the debate about international current account imbalances.