Dmytri asks:
I have a few questions regarding this productivity boom that have not been
answered sufficiently in what I have read so far.
Productivity, as best as I can tell, is defined as follows:
Productivity = (Gross Output - Foreign Inputs) / Domestic Labour
So, foreign inputs are simply ignored by the formula, doesn't this mean
that if cheaper foreign inputs displace domestic inputs that this calculation
would show a rise in productivity?
Dmytri, foreign inputs don't appear to be ignored in the formula you've
given above, but I would definitely agree with you that as cheaper foreign
labor inputs displace domestic labor inputs, "productivity" would rise. I
would crudely measure "labor productivity" by dividing "real GDP" in a
period by the number of "labor input units" employed during the same
period. I would also add that ANY measure of "productivity" is sure to
increase in value if firms are:
1. learning how to do more with fewer full-time labor inputs
2. learning how to replace full-time labor input with temporary labor input
3. learning how to replace labor-intensive processes with more
capital-intensive ones
4. learning how to replace domestic labor input with foreign labor input
(as you mention)
...which is what is happening in the US today, thus the so-called
productivity boom.
Also, since US dollars sent abroad to pay for these foreign inputs will
eventually come home and make demands on US productivity, shouldn't this
increasing dependence on foreign inputs eventually cause inflation?
That's an interesting question. If US dollars are going abroad to purchase
machinery and equipment (increasing imports in machinery/equipment as is
happening in Canada today, see article below), there would be a downward
pressure on prices on the demand side -- and future productivity increases
on the supply side. Also, if US dollars are going abroad to purchase
cheaper foreign labor inputs, productivity rises (as you mention),
"theoretically" expanding aggregate supply and putting downward pressures
on the average level of prices.
But there are so many other factors and the part I wrote above about US
dollars going abroad to purchase machinery/equipment is not happening.
Thanks for the interesting thoughts.
Diane
Surge in imports spurs hopes for gains in productivity
Machinery demand fuels record gains
The Globe and Mail
Wednesday, Jul 14, 2004
Exploding demand for machinery and equipment fuelled a record surge in
Canadian imports in May, sparking hopes that the long-awaited improvement
in productivity may be around the corner.
The Canadian business sector has been lagging the United States in
productivity improvement since 2001.
The jump in imports -- attributed in part to a strong Canadian dollar --
cut sharply into Canada's trade surplus, which fell to $5.2-billion from
$7-billion a month ago.
Imports of machinery and equipment climbed 13.9 per cent during the month
to $9.6-billion, the largest increase since September of 1981, offering
some grounds for optimism that Canadian firms are investing in technology
that will bolster their competitiveness and yield long-awaited economy-wide
improvements in productivity.
Gains were widespread, affecting telecommunications gear, office machinery,
transportation equipment and laboratory supplies.
The sharp increase suggests "a meaningful capital spending cycle is
developing," said Robert Spector, of Merrill Lynch Canada Inc. "We've been
anticipating this for some time as companies take advantage of the stronger
Canadian dollar, the low cost of capital and lean balance sheets in an
effort to boost sagging productivity."
The rise implies spending in the economy is becoming more balanced between
the consumer and business investment, he added.
Overall imports climbed 7.8 per cent in May, the biggest gain since the
beginning of 1997, reaching a record $31.6-billion.
Exports showed a modest gain of 1.3 per cent to $36.8-billion.
"Businesses are more confident, and willing to shell out on machinery and
equipment," said Warren Lovely, senior economist at CIBC World Markets
Inc., with equipment imports now up 20 per cent from a year ago.
"Three solid months of labour-force growth show businesses are hiring and
investing in capital goods as well," Mr. Lovely said.
The upturn mirrored a Bank of Canada survey this week showing a growing
optimism among Canadian firms about sales prospects, investment intentions
and hiring.
Last year's 20-per-cent rise in the value of the Canadian dollar means
goods imported from the United States are cheaper, said Stephen Poloz,
chief economist at Export Development Canada (EDC). "It's like putting the
equipment on sale," he said, and "that's where our productivity catch-up
will come from."
More than 70 per cent of machinery and equipment imports come from the
United States.
Among those looking for productivity gains is Toronto-Dominion Bank, which
signed a $420-million contract with Hewlett-Packard Canada to upgrade its
network of banking machines and debit-card payment systems. The investment
will allow the bank to increase the volume of transactions and lower the costs.
The decrease in the merchandise trade balance in May is not a sign of
weakness, said Marc Pinsonneault, senior economist at National Bank of
Canada. Non-energy exports rose for a fourth month in a row, and reached a
record, measured in volume terms.
"Strong business investment, coupled with sustained activity in housing and
inventory rebuilding are paving the way for GDP growth of around 4.5 per
cent in the second quarter," he said.
Energy exports rose 3.3 per cent in May, fuelled by higher prices.
Meanwhile, EDC said yesterday that its latest survey shows that most
Canadian exporters are confident that good times are ahead.
The EDC's latest trade confidence index showed a reading of 75 out of 100,
a slight increase from the 74.8 score in the fall of 2003. The index is
based on a survey of 1002 Canadian companies.
Despite concerns about rising interest rates, oil prices and the election
of a minority government, almost one-third of respondents said their
outlook for international trade was positive.
Almost half said they expected export sales to rise.
Thirty-six per cent of respondents also said they expect to add staff over
the next six months.
"The world economy and the Canadian economy can't get much better than
this," Mr. Poloz said
