Quality Change in Capital Goods and Its Impact on Economic Growth

Charles R. Hulten

NBER Working Paper No. 5569
Issued in May 1996
NBER Program(s):Productivity, Innovation, and Entrepreneurship

This paper argues that productivity puzzles like the Solow Paradox arise, in part, from the omission of an important dimension of the debate: the resource cost of achieving a given rate of technical change. A remedy is proposed in which a new parameter, defined as the cost elasticity of producing capital with respect to the rate of technical change, is introduced. This parameter is shown to be latent in the Hall-Jorgenson user-cost of capital, as well as in the Solow residual. It is also shown that an increase in the rate of embodied technical change may actually cause a decrease in the Solow residual, in the short run, if the parameter is greater than the ratio of the user cost to the corresponding asset price. Different values of the new parameter also correspond to different theories of technological innovation: the Solow-Swan and Cass-Koopmans assumption of costless technical change is consistent with a zero value of the cost elasticity parameter, while the model of endogenous growth with R&D externalities implies a larger value. Finally, the appropriate investment-good price deflator is shown to be a function of the cost-elasticity. When the parameter equals zero, no quality adjustment should be undertaken, but values greater than zero lead to a partial adjustment for quality change, and a value of one leads to a full correction.

download in pdf format
   (1615 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w5569


Users who downloaded this paper also downloaded* these:
Lee w4725 Capital Goods Imports and Long-Run Growth
Mincer w0803 Human Capital and Economic Growth
Nordhaus Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not
Hulten w5847 Infrastructure Capital and Economic Growth: How Well You Use It May Be More Important Than How Much You Have
Collins and Williamson w7145 Capital Goods Prices, Global Capital Markets and Accumulation: 1870-1950
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us