After reading a story predicting continued increases in computer power, I tried to come up with a simple way of conveying how this might have an impact on economic growth.
Suppose that in 1987, fifteen years ago, the noncomputer sector was 99.5 percent of the economy, and the computer sector was only 0.5 percent of the economy. Then the average growth rate would be (.995 times 1) plus (.005 times 20), or about 1.1 percent...
But in another ten years, computers will be 27 percent of the economy. If computers are still improving at a rate of 20 percent per year at that point, overall growth will be (.73 times 1) plus (.27 times 20), or 6.4 percent!
Brad DeLong then accused me of using a Laspeyres price index to arrive at my 20 percent growth assumption for the computer sector. In fact, I was just taking a wild guess. He makes the point that an increased share of computers in the economy depends on our ability to come up with uses for enhanced computer power.
Discussion Question. New Growth Theory, as I understand it, says that technological change is endogenous. Would New Growth Theory say that if computers are getting faster, that is because the demand is there for faster computers?
