iy and Growth ohne Chapters Ret 4 track R&D activity is to measure these expenditures relative to gross domestic product, or GDP. Federally supported R&D should be distinguished from pri- vate R&D, which consists primarily of ihdustry outlays plus a small amount by the private nonprofit sector. Federally supported R&D fell from a high of nearly 2 percent of GDP in 1964 to about 1 percent recently. Private R&D has grown slightly from about 1 percent of GDP in 1964 to about 1.5 percent recently. Research suggests that a dollar of federally supported R&D contributes les, to economic growth than does a dollar of company-supported R&D. pethaps because most federally supported R&D has military objectives. Thus, although the decline in federal R&D may have contributed to the slowdown in produc- tivity growth during the 1970s, the impact would have been greater had the de- cline in R&D occurred primarily in the'private sector. In dollar terms, US. investment in R&D was recently greater than that in Japan, Germany, and France combined. Relative to GDP, the United States and Japan were tied for first place among major industrialized countries. According to the US. Labor Department, investment in RED contributed about 0.2 percentage ‘points to the annual growth in labor productivity since 1974, which was about what it ‘contributed annually it the decade prior to 1974, ‘BLet’ summarize the conclusions regarding the role of different contributions to the slower growth in USS. labor productivity since 19742First, increases in the ratio of capital to labor—cupital deepening—added a tiny bit less to the growth in labor productivity since 1974 than it had added prior to 1974, Second, changes in workforce quality appear to bear litle or no responsibility for the post-1974 slowdown in labor productivity growth. Third, the service sector’ growing share of the labor force accounts for some of the slowdown, perhaps half or more. Fourth, high federal deficits may have contributed to the slowdown, though the evidence remains tentative. And, fifth, R&D spending has not been a deciding factor because it contributed about the same amount to productivity growth in the last quarter century as it had during the decade prior to 1974 The most dramatic technological development in recent years has been the information revolution powered by the computer chip. The following case study looks at the impact of computers on economic growth tivity Growth Ce the first microprocessor, the Intel 4004, could execute about 400, instructions per second when it hit the market in 1971. IBM’s first PC, introduced a decade later, could exe cute 330,000 instructions per second. Today a $1,000 computer can handle 200 million in», structions per second, and more upscale models can crunch one billion instructions per second, or 2.5 million times the number the 1971 Intel 4004 could handle. you would tks to learn ‘more about the productivity c’ffect of computers, read ‘Adam Zaretsky’s “Have Com- puters Made Us More Produc: tive? A Puzzle.” Its available ‘tom the Federal Reserve Bank of St. Louis at httpsiwvew sts frb.orgy publictionsire/199@/aire1998 anim riche "Praductvig RSD. and Base Resch athe Fen Level inthe 19704 er ich 1986) pp 141-154, - iesearch and Development Such advances in computing power have fueled a boom in. computer use ‘There are now about as many computers as auto; DEPTS [OOH growth of the computer sector averaged 26 percent annu (From 198715 19 ally. US. companies and universities arc way abcad of other countries in high- cechnology applications, ranging from software to biotechnology. In (S9Mthere_ wwete about 40 personal computers pet 100 persons in the United States, mak- ing us the world leader. Personal computers are moving beyond word processing and spreadsheet analysis " her."For example, design engineers in Cali- fornia can use the Internet to try gut new ideas with marketers in New York, cutting development time in half. Sales representatives on the road can use laptops to log orders and provide customer service. US. insurance companies can coordinate data entry done as far away as Europe to handleclaims more efficiently. — Computers not only improve the quality and safety in the automobile and airline industries but also increase the versatility of machines, which can be re- programmed for different tasks.A new generation of machines monitor them- selves with a computer chip and send messages through the phone lines to a service center, detailing problems when they arise. For example, General Elec tric uses the Internet to keep tabs on factory equipment thousands of miles away. Many home appliances will soon be Internet compatible. Sharp Electron- ics, for example, has developed a stereo that downloads music from the Web. ® Is been said that we can see computers everywhere except in the produc~ tivity statistics. Why hasn't USS. productivity jumped in response to the growing use of computers? Ifall the direct and related contributions of computers are included, about one-half of a percentage point of the 2.9 percent average swowth in fal GDP fetuses 1922 and 1094 came from computers ‘To be sure, this represents a substantial addition to growth, increasing the rate by one-fifth, but it’s disappointingly small for a technology that seems to hold so much promise ‘One problem is that despite all we hear about the computer revolution, computers are not yet everywhere. For example, though spending on computers Sane a poring faeces ofall iovestmer, gy foe A pase. capital stock consists of computers and peripheral equipment.tn contrast, pre- ‘ous technological revolutions captured a much larger share of investment. In 1890, for example, railroads accounted for about one-fifth of the U.S. capital stock, Another problem is that many benefits of computers affect unmeasured attributes of output. For example, computers improve communications among ‘porkers uth Tinks such a ecmaliand enfance consumer convenience wih de> Vices such as automatic teller machines. Thus, some of the productivity gains of computers go unmeasured. A thisd problem is that we have not yet learned hoy ‘puters, stich as banking and ne. Finally, some comy nthe job playing computer games. "An optimistic view is that the big productivity gains from information tech- nology are still to come, as people learn to use computers more effectively and 4s fiesh applications are developed. When new technologies are introduced, pro- ductivity often falls initially as workers try to master new and unfamiliar skills —__But over time, experience starts paying off. What's more, the technology itself improves and becomes more user friendly. Nearly half the Americans who today use computers at home, school, or work are 20 years of age or younger. As these computer-literate peaple enter the workforce, the rates of return t© computer ap a sign of the times, Taco Bell models its cash re; to this view, change takes time. For example, Thomas Edison de~ signed the first electrical power plant in 1882, but it took another four decades for U.S. companies to convert from water oF steam power to electricity. Ifthe optimists are correct, computers could add as much as one percentage point to the annual growth rate of US. real GDP by the year 2006. That would be an impressive amount. Source: Joseph Hamowts, “Has th Surge in Computes Spend International Productivity Comparisons How does US. productivity growth compare with that in other industrial countries? Exhibit 5 shows that average growth in labor productivity between 1960 and 1997 for the United States and the six other leading industrial coun- tries (called the Group of Seven, or G-7, countries). In keeping with what we have learned about productivity growth, the period is divided into two inter- vals: 1960 t0 1973 and 1974 to 1997 ($6018) ‘As you can see, uring the fs nae the U. th rat others except Canada"The 2.9 percent U.S. average grow between 1960 SRTISTS was a htle more than half the 3.2 percent average for the sx other countries. Why was the U.S.zate so low? With the exception of Canada Ercabos couse wens sare boars loses lel ncaa of = vige World War IL Because the level of productivity was relatively low in these other countries, it was easier to show improvement, During the more recent period. US. prodicnvity growth was till below 2 © countries, but ed fiom an aver Some final thoughts before turning to other matters. US. productivity growth since 1974 appears slow compared to the high growth rates immedi- ately following World War IL But many economists believe the tapid growth prior io 1973 gccurred hecause the economy was making up for opportunitics Jost during the crushing depression, Such growth, they say, should not be used as the benchmark against which to judge current growth rates. US. productiv- ity growth since 1974, chougl low the historic: be, Below the average of other industrial economies Whar's more, U.S. productivity {growth has improved recently, averaging 1.9 percent between 199} ers not forger, the US. economy is still considered the world’s most competi tive, and Americans continue to enjoy the world’s highest standard of living,