13. Productivity - capital efficiency

The output capacity of the economy can increase if the efficiency of machines increases. An increase in machinery efficiency reduces the need for capital. This will make production less capital intensive with the usual measure of capital. If, however, capital is measured in efficiency units, production will become more capital intensive, which raises productivity and production in the long run. In the following, machinery efficiency is increased by 1 percent permanently. (See experiment)

 

Table 13. The effect of a permanent increase in machinery efficiency

    1. yr 2. yr 3. yr 4. yr 5. yr 10. yr 15. yr 20. yr 25. yr 30. yr
    Million 2010-Dkr.
Priv. consumption fCp 25 -189 -118 339 694 1258 1621 2115 2579 2918
Pub. consumption fCo 0 0 0 0 0 0 -2 -2 -5 -6
Investment fI -2576 -3815 -2112 -1086 -743 -540 -801 -1034 -1228 -1408
Export fE 217 459 715 955 1184 1881 1725 1126 517 133
Import fM -1358 -2031 -992 -220 111 493 447 332 199 79
GDP fY -975 -1504 -536 405 995 2067 2063 1853 1658 1559
    1000 Persons
Employment Q -1.15 -1.95 -1.55 -0.77 -0.05 1.62 1.43 0.78 0.21 -0.15
Unemployment Ul 0.62 1.01 0.77 0.36 0.00 -0.82 -0.71 -0.39 -0.10 0.07
    Percent of GDP
Pub. budget balance Tfn_o/Y -0.03 -0.06 -0.03 0.00 0.03 0.07 0.05 0.04 0.03 0.02
Priv. saving surplus Tfn_hc/Y 0.11 0.18 0.10 0.03 0.00 -0.03 -0.01 0.00 0.00 0.00
Balance of payments Enl/Y 0.08 0.12 0.07 0.04 0.03 0.04 0.05 0.04 0.03 0.02
Foreign receivables Wnnb_e/Y 0.13 0.30 0.35 0.36 0.36 0.39 0.48 0.57 0.62 0.64
Bond debt Wbd_os_z/Y 0.06 0.13 0.15 0.13 0.10 -0.16 -0.40 -0.52 -0.57 -0.58
    Percent
Capital intensity fKn/fX 0.01 -0.02 -0.10 -0.15 -0.18 -0.19 -0.15 -0.11 -0.09 -0.07
Labour intensity hq/fX 0.01 0.00 -0.04 -0.06 -0.06 -0.06 -0.05 -0.05 -0.05 -0.06
User cost uim 0.01 0.00 0.00 0.00 0.00 0.02 0.08 0.12 0.15 0.15
Wage lna -0.03 -0.06 -0.10 -0.12 -0.13 -0.04 0.10 0.20 0.24 0.24
Consumption price pcp -0.02 -0.05 -0.07 -0.08 -0.09 -0.09 -0.05 0.00 0.03 0.04
Terms of trade bpe -0.02 -0.04 -0.05 -0.07 -0.07 -0.07 -0.04 -0.02 0.00 0.00
    Percentage-point
Consumption ratio bcp 0.03 0.02 0.01 0.03 0.06 0.08 0.07 0.08 0.08 0.09
Wage share byw 0.01 0.00 -0.02 -0.03 -0.02 0.03 0.07 0.08 0.08 0.08

(See details)

 

As the efficiency of machines improves, the stock of machinery is reduced, and investment in machinery falls. The lower investment demand reduces production in the short run which further reduces machinery investment. Due to the high import content of machinery investments, imports also fall in the short run. The fall in machinery reduces capital cost and output prices, and the higher unemployment reduces wages. The combined effect is a fall in prices and the price effect occurs relatively quick due to the initial shock to efficiency. As prices fall competitiveness improves and hence exports and production rise. Over time employment returns to the baseline through the wage-driven crowding out. The wage relation in ADAM is a Phillips curve, which links the changes in wages to unemployment. A fall/rise in unemployment pushes wages and hence prices upward/downward and reduces/improves competitiveness. So exports and production decrease/increase and over time unemployment returns to its baseline. This is the wage-driven crowding out process. It may be noted that output per man hour increases in the long term as the higher efficiency of machines induces the substitute of machinery for labor.

 

Private consumption falls initially but in the long run it rises. This is because real income falls at first before it permanently increases. It is noted that the higher machinery efficiency will also stimulate the real income of transfer recipients. There is a permanent fall in machinery investment since the lower machinery inventory requires lower reinvestment. In the long run there is a slight positive effect on the nominal wage and a negligible impact on exports.

 

Public finances deteriorate first as transfer payments to the unemployed increase in the short run and improves in the long run.

 

Figure 13. The effect of a permanent 1 percent increase in machinery efficiency

 

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