ICT Prices and ICT Services: What do they tell us about Productivity and Technology?

This paper reassesses the link between ICT prices, technology, and productivity. To understand how the ICT sector could come to the rescue of a whole economy, we introduce a simple model that sets out the steady-state contribution of the sector to the growth in U.S. labor productivity. The model extends Oulton (2012) to include ICT services (e.g., cloud computing) which has implications for the relationship between prices for ICT services and prices for the capital stocks (i.e., ICT assets) used to supply them. ICT asset prices are then put under a microscope, and official prices are found to substantially understate ICT price declines. And because ICT use continues to diffuse through the economy—increasingly via cloud and related services which are not fully accounted for in the standard narrative on ICT’s contribution to economic growth—the contribution of ICT to growth in output per hour going forward is calibrated to be substantially larger than thought in the past.