Investment-specific Technological Progress - How Do You Measure Investment-specific Technological Progress?

How Do You Measure Investment-specific Technological Progress?

While measuring technological progress is not easy, economists have found indirect ways of estimating it. If "'investment-specific'" technological progress makes producing goods easier, then the price of the goods affected (relative to the price of other goods) should decrease. In particular, "investment-specific" technological advance has affected the prices of two inputs into the production process: equipment and structures. Think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then one would expect the price of them to fall or the value of them to rise relative to older versions of the same good.

Figure 2 (the pink line) shows how the price of new producer durables (such as equipment) in the US relative to the price of new consumer nondurables (like clothing) has consistently declined over the past fifty years (Gort et al. 1999). To calculate the relative price of producer durables divide the price that firms pay (for the durable inputs of production) by the price that a regular consumer pays (for things like jeans). We use relative prices so we can say how many units of equipment can be bought instead (or in terms) of buying one unit of consumer goods. Figure 3 (the pink line) says that over time, firms have been able to buy more and more units of equipment instead of one unit of consumption, especially when we take into account that the quality of equipment being acquired has increased (a computer today is much faster than a computer five years ago and we should take that into account when comparing their prices). When changes in quality are not taken into account (which is wrong) it looks like the price of equipment has not decreased as much (see the black line in Figure 2).

Measuring the price of structures is more complicated than measuring the price of equipment, but economists have again been able to get an idea of how much progress there has been in structures (such as buildings). One approach is that if newer buildings were constructed or designed using newer technologies then they should be worth more than older buildings (because they embody the new technology (Gort et al. 1999). In particular, they should rent for more. As Figure 3 shows, this is true. Renting a square foot in a new building is much more expensive than renting a square foot in a building forty years old. So it must be the case that you are paying for a nicer, more functional and maybe even safer building.

Figures 2 and 3 suggest that investment-specific technological change is operating in the US. The annual rate of technological progress in equipment and structures has been estimated to be about 3.2% and 1%, respectively (Gort et al. 1999) (Greenwood et al. 1997).