1. For this week, please be sure you have read a story on determinants or 
costs
of long-term or very high inflation and/or on very high or long-term
unemployment.  Later in the course we will examine changes in unemployment and
inflation (and their relation) in the short run; this week we focus on
definitions and long-run determinants and costs.  (Hint: for unemployment, 
what
has happened to the workweek in France?)

2. Concerning growth, you might want to look at:  Report: Corruption Ruining
Economies Of South Asia
        http://dailynews.yahoo.com/h/nm/19991101/wl/asia_un_1.html
(a Reuters story)

3. Concerning measurement of "The New Economy," a fellow student recommends 
the
Economist article at
http://www.economist.com/editorial/freeforall/current/index_fn8276.html
will all the pretty pics and graphs, or the plain text version below.


E-xaggeration: The digital economy is much smaller than you think

NEWSPAPERS and magazines are packed with stories about the digital economy,
the information-technology (IT) revolution and the Internet age. That their
pages are filled with advertising from IT firms presumably has nothing to do
with it. Such firms account for a quarter of the total value of the S&P 500,
and this week Dow Jones announced that Microsoft, Intel and SBC
Communications will be included in its industrial average from November 1st.
Not before time, many say, for high-technology businesses now account for a
huge chunk of the economy. Actually, they don't.
New figures published on October 28th by America's Department of Commerce
appear to support the view that IT is very important to the American
economy. The department now counts all business spending on software as
investment (previously, it was a cost). This has both increased the apparent
size of IT investment and boosted America's rate of growth in recent years.
But measuring the size of the "new" economy is a statistical minefield. The
most generous estimate comes from the OECD, which tracks the
"knowledge-based economy". It estimates that this accounts for 51% of total
business output in the developed economies-up from 45% in 1985. But this
definition, which tries to capture all industries that are relatively
intensive in their inputs of technology and human capital, is implausibly
wide. As well as computers and telecoms, it also includes cars, chemicals,
health, education, and so forth. It would be a stretch to call many of these
businesses "new".
A study published in June by the Department of Commerce estimates that the
digital economy-the hardware and software of the computer and telecoms
industries-amounts to 8% of America's GDP this year. If that sounds rather
disappointing, then a second finding-that IT has accounted for 35% of total
real GDP growth since 1994-should keep e-fanatics happy.
Perhaps unwisely. A new analysis by Richard Sherlund and Ed McKelvey of
Goldman Sachs argues that even this definition of "technology" is too wide.
They argue that since such things as basic telecoms services, television,
radio and consumer electronics have been around for ages, they should be
excluded. As a result, they estimate the computing and
communications-technology sector at a more modest 5% of GDP-up from 2.8% in
1990. This would make it bigger than the car industry, but smaller than
health care or finance. In most other economies, the share is lower; for the
world as a whole, therefore, the technology sector might be only 3-4% of
GDP.
But what, you might ask, about the Internet? Goldman Sachs's estimate
includes Internet service providers, such as America Online, and the
technology and software used by online retailers, such as Amazon.com. It
does not, however, include transactions over the Internet. Should it?
E-business is tiny at present, but Forrester Research, an Internet
consultancy, estimates that this will increase to more than $1.5 trillion in
America by 2003. Internet bulls calculate that this would be equivalent to
about 13% of GDP. Yet it is misleading to take the total value of such goods
and services, whose production owes nothing to the Internet. The value added
of Internet sales-ie, its contribution to GDP-would be much less, probably
little more than 1% of GDP.
This is not to deny that the Internet is changing the way that many firms do
business-by, for example, enabling them to slim inventories-but, in the near
future, as a proportion of GDP, it is likely to remain small.
A Luddite's lament

If measuring the size of the technology sector is hard, calculating its
contribution to real economic growth is trickier still, because the prices
of IT goods and services (adjusted for quality) have fallen sharply relative
to the prices of other goods and services. For example, official figures
show that America's spending on IT has risen by 14% a year in nominal terms
since 1992, but by more than 40% a year in real terms. This figure is so
high partly because it is extremely sensitive to assumptions about the rate
at which the price and quality of IT is changing.
The Commerce Department calculates that the technology sector has
contributed 35% to overall economic growth over the past four years. But
because such figures are based on spending in real terms, the Goldman Sachs
study reckons they are misleading. In nominal terms, IT has accounted for a
more modest 10% of GDP growth in the past four years.
Another popularly quoted figure is that business spending on IT has risen
from 10% of firms' total capital-equipment investment in 1980 to 60% today.
But again, this is based on constant-dollar figures, and so it hugely
exaggerates the true increase. In terms of current dollars (and before the
latest revisions), Goldman Sachs calcuate that business investment in
computers accounts for 35% of total capital spending, not 60%. And even this
exaggerates the importance of IT, because much of the money goes to replace
equipment which becomes obsolete ever more quickly. The share of IT in
additional "net" investment is much smaller. Computers still account for
only 2% of America's total net capital stock.
For years economists have been seeking in vain for evidence that computers
have dramatically raised productivity. One explanation for the failure of
productivity to surge may be that official statistics are understating its
growth. Another is that much investment in IT has been wasted: hours spent
checking e-mail, surfing the Net or playing games reduce, not increase,
productivity. A third may simply be that IT is still too small to make a
difference: for the moment, appropriately enough, you can count the digital
economy on the fingers of one hand.
That is changing, and firms are learning. And note this: if you add in all
computer software and telecoms (on the widest definition), the share of IT
in the capital stock rises to 10-12%. As it happens, this is almost the same
as railways at the peak of America's railway age in the late 19th century.
Railways boosted productivity and changed the face of Victorian commerce.
Hype is hype-but the new economy may yet happen anyway.


LINKS
The Commerce Department's statistics on information technology spending are
summarised in a press release
<http://www.census.gov/Press-Release/www/1999/cb99-205.html>. The complete
text of Emerging digital economy II
<http://www.ecommerce.gov/ede/report.html>, issued in June 1999, has been
released on the web. Details of the OECD's research on knowledge-based
economies are available here
<http://www.oecd.org//dsti/sti/stat-ana/prod/scorebd_summ.htm>. Forrester's
latest e-commerce estimates are published as a chart and table
<http://www.forrester.com/ER/Press/ForrFind/0,1768,0,FF.html>.

David I. Levine                 Associate professor
Haas School of Business    ph: 510/642-1697
University of California    fax: 510/643-1420
Berkeley CA  94720-1900                            email:
levine@haas.berkeley.edu
http://web.haas.berkeley.edu/www/levine/