NCPA - National Center for Policy Analysis

Computer Sector Grows -- But Does It Grow The Economy?

August 5, 1998

Capital investment in computers and related equipment has grown rapidly in the past few years, but economists differ on what impact computers are having on the United States economy, according to a study published by the Federal Reserve Bank of Kansas City.

Some economists say computers' contribution to output growth has been modest so far, while others believe the computer revolution -- like other technological advances such as electrification -- will have its greatest impact some decades after introduction.

  • From 1982 to 1996, growth in the computer sector averaged over 26 percent annually, while growth in the economy as a whole averaged less than 2.6 percent annually.
  • More recently, from 1994 to 1996, computer sector growth exceeded 55 percent annually, while the economy as a whole expanded 2.5 percent.
  • Real business investment in computers from 1992 to 1996 represented over 13 percent of all business investment and nearly 18 percent of business investment in equipment.

But despite the fact that the real capital stock of computing equipment grew at an average rate of 35 percent a year from 1972 to 1996, according to a standard model it has only added an average of 0.31 percentage points to the rate of overall output growth -- a modest contribution of about 8.4 percent to economic growth.

But under alternative assumptions that account for external effects -- or spillovers from one technology to others -- economists estimate computing equipment contributed 0.48 percentage points on average to output growth over the same period -- a contribution more than 50 percent larger than under standard assumptions.

And under an optimistic scenario, economists say computing equipment will have a greater impact over the next decade, adding almost 0.9 percentage points to output growth in 2006.

Source: Joseph H. Haimowitz, "Has the Surge in Computer Spending Fundamentally Changed the Economy?" Economic Review, Second Quarter 1998, Federal Reserve Bank of Kansas City, 925 Grand Boulevard, Kansas City, Mo. 64198, (816) 881-2683.


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