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Steve, great message.

I think the focus on national productivity is again symptomatic of equating a country with a firm. With firms, increasing productivity is good. It lowers a firm's cost and increases profit. With a country, increasing productivity might be bad. It decreases the population's income, and stagnates the economy.

It's an intriguing argument and worthy of serious consideration. In an extreme case, not only a productivity loss, but negative value added at constant prices for an extractive industry can occur. At constant prices, gross output may be less than the value of intermediate inputs, even though the industry is earning a healthy surplus at current prices.

I'm not sure about the statement that gross national income (GNI) is the new name for gross national product (GNP). Certainly this is true at current prices. I don't think it is true in volume terms, or as Statistics Canada wishes to call it, in real terms. The old volume estimates of GNP were based on double deflation of exports and imports using export- and import-specific deflators. Interest income received from abroad was part of service exports and interest income paid abroad was part of service imports. The index of real GNI published by StatsCan is based on direct deflation of net exports using the same definitions by the deflator for gross domestic final expenditures (GDFE), which, abstracting from a questionable treatment of the statistical discrepancy, is esentially final domestic demand plus investment in inventories. Therefore the real GNI estimates will incorporate gains from terms of trade that Professor Gordon mentions in his blog which were never part of the real GNP estimates.

One can debate whether it is really useful to define real GNP and real GNI in such different ways when their nominal aggregates are the same. Arguably, real GNI should be defined as GNI at current prices deflated by the real GNP deflator. But that's not what is done now.

How does productivity get calculated for industries whose focus is to increase reserves (mining or oil & gas)? I understand widgets per workhour, I can even understand design engineering hours per piece of new equipment, but if nothing is "produced" what is productivity?

I am no economist (nor did I stay at a Holiday Inn Express last night :-}) but the shape of our economy must surely affect the way its metrics are calculated.

That makes sense to me, but I have had another idea for some time, which I am not sure is sensible.

Could the faster measured growth of "productivity" in the U.S. than in Canada be the product of free trade? Suppose that, when free trade came in, more production from Canada moved to the U.S. than the other way around, attracted by the larger market there. That would bid up wages in the U.S. relative to Canada, raise prices of things made in the U.S. relative to things made in Canada, and therefore the value of production per hour worked would go up more there.

I presume that there is some effort made to account for such changes in the terms of trade, but how good can that possibly be, when so many things made now were not even made 10 years ago. How can you compare today's prices in any meaningful way with prices even 10 years ago?

Even if the above idea is true, it would not, of course mean that free trade has necessarily been bad for us. Both Canada and the U.S. might have gained, only the U.S. gained more.

I'm not sure if you're drawing the right conclusions here.

For one thing, MFP is not equal to technological change - as I'm sure you're aware, it's "everything else" that's exogenous to the model. So, its decline is not an artifact - it's just telling you something other than the rate of technological change. In this case, there's an apparent connection with resource extraction. If you look at the price of oil over the last several decades (e.g., http://www.wtrg.com/oil_graphs/oilprice1947.gif), there seems to be a correlation with MFP in the resource sector. That makes sense, since resource extraction is very energy-intensive (not sure how your MFP calc deals with price controls on oil, so I'll ignore that). Long-term, if price of oil rises, at least a component of MFP should decrease in any industry that is reliant on oil (technological change could offset).

In addition, the recent rise in price is associated (at least in part) with decreasing supply of conventional and increasing production of unconventional oil. Unconventional = harder to extract = decreased MFP. So, any increase in the price of oil will increase income in some form among oil producers - but this is just a case of rent-seeking (i.e., not driving future economic growth). Then, as lower and lower quality resources are extracted (since best will be extracted first) in, e.g., the oil sands, you're pouring increasing amounts of capital into a sector with ever-decreasing productivity. Unless technological change outpaces the rate of resource quality decrease, but that doesn't seem to be occurring at this point.

So, I think my point is that the MFP decrease does matter in the long-term and that any increase in income at this point is mainly due to rent-seeking and not contributing significantly to future growth - in the sense that the income comes from sucking wealth from more productive sectors. This should motivate people to come up with alternatives, however such alternative paths have to compete with, e.g., oil sands for capital - which creates a problem for a country that is pouring capital into the oil sands at an increasing rate.

Isn't the price change already taken out when estimating the productivity? All these Quantities (GDP numbers) are at constant prices.

Nice post Stephen.

Surdan: I don't think I understand your post. Let me see if I can break it down.

1) Suppose relative prices change (e.g. oil prices rise.) If we're a net exporter of that stuff, we're unambiguously better off. We'll probably try to produce more of it, shifting resources from other sectors (e.g. Quebec) into the now-more-valuable sector (e.g. NFLD)

2) But the law of diminishing marginal returns says productivity in the shrinking sector should now rise(!) Wages and returns to capital in the oil sector should go up by less than the rise in oil prices because the new oil is harder to extract.

3) But our productivity calculations (I think) abstract from price changes. They just see that it take more person-years and corporate bonds to produce a barrel of oil. That means productivity goes down in the oil sector.

4) But we noted in (1) that we're better off with the higher price of oil, and moving more resources into oil production helps us even more. Sure, productivity looks like its gone down....but the price increase more than compensates us for this. Hence we're better off with the new, lower level of productivity(!)

Okay, I've abstracted from a few things (e.g oil reserves can run out; low capacity in the non-oil sector may hurt productivity there). But I think that I agree with Stephen's point; productivity measures ignore price changes, and those price changes can have large permanent influences on our standard of living.


I wonder how much of this is attributable to factors that confound the measuring of Ai. How are the effects of harder-to-get oil and more environmental protections captured? One might not believe that 1960s technology was superior, but given those reserves and regulations...

I would also be wary of relying on GNI to trend over GDP. Producers will respond by producing more, pushing down prices so that eventually GNI should return to GDP.

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