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Quality Change in Capital Goods and Its Impact on Economic Growth

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  • Charles R. Hulten

Abstract

This paper argues that productivity puzzles like the Solow Paradox arise, in part, from the omission of an important dimension of the debate: the resource cost of achieving a given rate of technical change. A remedy is proposed in which a new parameter, defined as the cost elasticity of producing capital with respect to the rate of technical change, is introduced. This parameter is shown to be latent in the Hall-Jorgenson user-cost of capital, as well as in the Solow residual. It is also shown that an increase in the rate of embodied technical change may actually cause a decrease in the Solow residual, in the short run, if the parameter is greater than the ratio of the user cost to the corresponding asset price. Different values of the new parameter also correspond to different theories of technological innovation: the Solow-Swan and Cass-Koopmans assumption of costless technical change is consistent with a zero value of the cost elasticity parameter, while the model of endogenous growth with R&D externalities implies a larger value. Finally, the appropriate investment-good price deflator is shown to be a function of the cost-elasticity. When the parameter equals zero, no quality adjustment should be undertaken, but values greater than zero lead to a partial adjustment for quality change, and a value of one leads to a full correction.

Suggested Citation

  • Charles R. Hulten, 1996. "Quality Change in Capital Goods and Its Impact on Economic Growth," NBER Working Papers 5569, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:5569
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    References listed on IDEAS

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    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
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    11. Hulten, Charles R, 1992. "Growth Accounting When Technical Change Is Embodied in Capital," American Economic Review, American Economic Association, vol. 82(4), pages 964-980, September.
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    13. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586-586.
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    Cited by:

    1. James Bessen, 2002. "Technology Adoption Costs and Productivity Growth: The Transition to Information Technology," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 443-469, April.
    2. Michael J. Geske & Valerie A. Ramey & Matthew D. Shapiro, 2007. "Why Do Computers Depreciate?," NBER Chapters,in: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, pages 121-150 National Bureau of Economic Research, Inc.
    3. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information technology explain why productivity accelerated in the United States but not the United Kingdom?," Harvard Institute of Economic Research Working Papers 2021, Harvard - Institute of Economic Research.
    4. Brazell, David W. & Mackie, James B. III, 2000. "Depreciation Lives and Methods: Current Issues in the U.S. Capital Cost Recovery System," National Tax Journal, National Tax Association, vol. 53(n. 3), pages 531-62, September.
    5. Per Krusell, 1997. "Quality change in the CPI - commentary," Review, Federal Reserve Bank of St. Louis, issue May, pages 107-111.
    6. Fernando del Rio Iglesias, 2002. "Neutral, Investment-Specific Technical Progress and the Productivity Slowdown," Recherches économiques de Louvain, De Boeck Université, vol. 68(1), pages 37-54.
    7. Daniel J. Wilson, 2002. "Is Embodied Technology the Result of Upstream R&D? Industry-Level Evidence," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 285-317, April.
    8. Susanto Basu & John G. Fernald & Nicholas Oulton & Sylaja Srinivasan, 2003. "The Case of the Missing Productivity Growth: Or, Does Information Technology Explain why Productivity Accelerated in the US but not the UK?," NBER Working Papers 10010, National Bureau of Economic Research, Inc.
    9. Charles R. Hulten, 1997. "Quality change in the CPI," Review, Federal Reserve Bank of St. Louis, issue May, pages 87-100.
    10. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.

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