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Quality Change in Capital Goods and Its Impact on Economic Growth

  • Charles R. Hulten
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    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.

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    File URL: http://www.nber.org/papers/w5569.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5569.

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    Date of creation: May 1996
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    Publication status: Published as "Quality Change in the CPI: Some Missing Links", Challenge - the Magazine of Economic Affairs. Vol 40, no 2. (March-April 1997): 48-74.
    Handle: RePEc:nbr:nberwo:5569
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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 1002-37, October.
    2. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    3. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
    4. Hercowitz, Z., 1992. "Macroeconomic Implication of Investment-Specific Technological Change," Papers 13-92, Tel Aviv - the Sackler Institute of Economic Studies.
    5. Zvi Griliches, 1998. "The Search for R&D Spillovers," NBER Chapters, in: R&D and Productivity: The Econometric Evidence, pages 251-268 National Bureau of Economic Research, Inc.
    6. Romer, Paul M, 1990. "Endogenous Technological Change," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S71-102, October.
    7. Solow, Robert M., 2000. "Growth Theory: An Exposition," OUP Catalogue, Oxford University Press, edition 2, number 9780195109030.
    8. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, October.
    9. Hulten, Charles R, 1992. "Growth Accounting When Technical Change Is Embodied in Capital," American Economic Review, American Economic Association, vol. 82(4), pages 964-80, September.
    10. Tjalling C. Koopmans, 1963. "On the Concept of Optimal Economic Growth," Cowles Foundation Discussion Papers 163, Cowles Foundation for Research in Economics, Yale University.
    11. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
    12. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    13. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
    14. Evsey D. Domar, 1963. "Total Productivity and the Quality of Capital," Journal of Political Economy, University of Chicago Press, vol. 71, pages 586.
    15. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, May.
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