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Chapter 22: Problem 6

Some economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many recent innovations, such as cloud computing. James Manyika, head of technology at McKinsey \& Company, has argued that for many of these innovations, "we have all these benefits but we're not paying for them." a. Before the arrival of the Internet, people looking for facts, such as the population of France or the salary of the president of the United States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in GDP? Briefly explain. b. Does your answer to part (a) indicate that the slowdown in U.S. productivity growth in recent years is just a measurement problem? What other information would you need to arrive at a definite answer?

Short Answer

Expert verified
No, the benefits of being able to do a Google search are not included in GDP as it is a free service used by individuals and doesn't involve a direct monetary transaction. While it may seem that the slowdown in U.S productivity growth could be a measurement problem due to GDP's inability to capture effects of such digital innovations, this can't be definitively stated without further information analyzing the broader impacts these services have on the economy and efficiency levels.

Step by step solution

01

Understanding GDP and Digital Innovations

Gross Domestic Product (GDP) is a traditional metric used to measure the productivity and economic health of a country. It includes all goods and services produced within a year. However, digital innovations such as the internet and cloud computing have created products and services that are consumed without a direct payment. As a result, these are not included in GDP. For instance, using Google to search for information is a free service that's not included in the GDP.
02

Evaluating the Measurement Problem

A measurement problem occurs when GDP fails to capture the economic effects of many recent innovations. As no payment is done by users for services like Google search, it does not contribute to the GDP, even though it creates considerable value. Hence, the increase in productivity due to such services is not measured.
03

Addressing the Slowdown in U.S. Productivity Growth

Although it might seem that the slowdown in U.S productivity growth is a measurement problem due to the failure of GDP to capture the impacts of digital innovation, we can't definitively say so. To arrive at a definite answer, other information like the impacts of these services on the economy, the cost savings, time saved, and improvements in efficiency should be considered.
04

Factors to be considered for a definitive answer

To determine whether the slowdown in productivity growth is just a measurement problem, information such as actual usage, impact of these non-monetary services on traditional economic activities, and how these free services have improved efficiency and effectiveness would be required. Furthermore, considering complementary effects like cost savings due to these digital innovations and time saved that can be used for other productive activities would help in arriving at a definite answer.

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Most popular questions from this chapter

Briefly explain whether any of the following policies are likely to increase the rate of economic growth in the United States. a. Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. b. Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. c. Congress provides more funds for low-interest loans to college students.

Writing in 2016 , economist Robert Gordon of Northwestern University stated his views of the effects of information technology on the economy: We don't eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the \(1950 \mathrm{~s}\), and we drive in motor vehicles that perform the same functions as in the \(1950 \mathrm{~s}\), albeit with more convenience and safety.... Most of the economy has already benefited from the Internet and web revolution, and in this sphere of the economic activity, methods of production have been little changed over the past decade \(\ldots .\) The revolutions in everyday life made possible by e-commerce and search engines were already well established [by 2004]. If Gordon's observations about the information revolution are correct, what are the implications for future labor productivity growth rates in the United States?

(Related to the Apply the Concept on page 746 ) In the 1961 edition of his best-selling introductory economics textbook, the late Nobel Laureate Paul Samuelson noted that Soviet GDP might become larger than U.S. GDP by \(1985 .\) a. In 1961 , why might a leading economist have expected that the Soviet economy might eventually become larger than the U.S. economy? b. Briefly explain why the Soviet economy failed to overtake the U.S. economy.

Deirdre McCloskey, an economist at the University of Illinois at Chicago, argued, "A poor country that adopts thoroughgoing innovation ... can get within hailing distance of the West \(\ldots\) in about two generations." a. What does McCloskey mean by a country adopting "thoroughgoing innovation"? What does she mean by a country getting within "hailing distance of the West"? b. A generation is usually considered to be about 25 years. In 2016, real GDP per capita in Italy was about \(\$ 33,500\) (measured in 2010 U.S. dollars), and real GDP per capita in Haiti was about \(\$ 1,500 .\) If Haiti adopted thoroughgoing innovation and as a result its average annual growth rate over the next 50 years increased to 6.5 percent, would Haiti end up with the level of real GDP per capita that Italy enjoyed in \(2016 ?\) [Hint: Use the following equation: Real GDP per capita \(_{2016} \times(1+g)^{50}=\) Real GDP per capita \(_{2066}\), where \(g\) is the average annual growth rate expressed as a decimal.] c. McCloskey also noted that her previous observation "does not mean that catch-up is inevitable." Briefly explain why low-income countries catching up with high-income countries isn't inevitable.

In an interview with the Wall Street Journal, Prime Minister Narendra Modi of India stated, "In two years, we have done a lot to position India to thrive in the changing world." He mentioned that under his administration, restrictions on foreign investment into India have been loosened. Why would loosening restrictions on foreign investment help position India to thrive? Briefly explain.
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