Session 4 c sharpe, a session 4c
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The document presents a methodology for calculating an "effective MFP" growth measure that captures productivity gains across global supply chains. It finds that accounting for productivity improvements in upstream industries, including those abroad, leads to higher estimates of productivity growth compared to traditional MFP measures. The authors apply this methodology to data from multiple countries between 1995-2007, finding contributions to downstream productivity from productivity gains in foreign industries, particularly for manufacturing. They also find effective MFP more closely correlated with international competitiveness measures than standard MFP.
Session 4 c sharpe, a session 4c
- 1. Presentation to the 33rd IARIW General Conference, Session 4C Rotterdam, The Netherlands August 26, 2014 Productivity Growth and International Competiveness Wulong Gu and Beiling Yan Statistics Canada Presented by: Andrew Sharpe, Centre for the Study of Living Standards and IARIW 1
- 2. Integration and competitiveness 2 The supply-chain integration of industries and firms has increased and become global in scope. The competitiveness of and productivity growth in the production of final demand products (e.g., automobiles) is a result of productivity gains in all stages of production in supply chains including both upstream and final-product producing industries (OECD, 2012, Altomonte and Ottaviano, 2011).
- 3. Productivity and Competitiveness 3 However, the standard measure of MFP growth does not capture the effect of the supply-chain integration and productivity gains in upstream industries on the productivity growth of final- product producing industries. Rather, standard MFP growth focuses on an industry in isolation and measures the efficiency with which capital, labour and intermediate inputs are used to produce output in that industry alone.
- 4. Objectives 4 Develop an alternate measure (effective MFP) that captures the impact of productivity gains in all stages of production in the supply chains on productivity growth and competiveness in the production of final outputs. Decompose the effective rates of productivity growth into the contributions coming from individual countries and industries to provide an assessment of country origins of aggregate productivity growth.
- 6. Methodology 6 The “effective” rate of MFP growth measures technical progress in an integrated production sector for producing final output (which consists of all industries in the various stages of production in the supply chain) In contrast, standard MFP growth focuses on individual industries in isolation and measures technical progress in an industry alone.
- 7. Methodology 7 Effective MFP growth measure was originally developed in a closed economy by Domar (1961), Rymes (1971), Hulten (1978), and Cas and Rymes (1991). It will be extended to an open economy to capture the effect of global supply chains and offshoring on MFP growth in this paper. Statistics Canada used to publish that measure (called inter-industry productivity growth) (Durand,1996; Statistics Canada, 1994).
- 8. Output and inputs for Integrated Production Sector 8 The output is the product delivered to final demand uses such as consumers, businesses, government and exports. The input includes capital and labour inputs used in all industries in the supply chain (which not only includes capital and labour directly used in the production of final product, but also those used indirectly in the production of intermediate inputs.
- 9. MFP for Integrated Production Sector 9 MFP growth (effective MFP) is the difference in the growth of output of final product and the growth of the capital and labour inputs used directly and indirectly in the production. Effective MFP growth provides a correct measure of MFP for the production of final demand categories such as investment and consumption goods (Greenwood et al., 1997; Basu and Fernald, 2010).
- 10. Alternative Method for Calculating Effective MFP 10 It can be shown that effective MFP growth for the production of a final product is equal to the weighted sum of standard MFP growth on gross output across all industries in the supply chain. The weights are equal to total production values of the industries that are required for producing one unit of output of the final product (obtained from the Leontief Inverse).
- 11. Standard vs. Effective MFP 11 Effective MFP growth for the production of total final demand will be equal to the standard MFP growth in a closed economy (Hulten 1978). It will differ from standard MFP growth if the domestic industries purchase intermediate inputs from foreign countries and productivity growth in the production of intermediate inputs differs across countries. Effective MFP growth will be higher than standard MFP growth if productivity growth in the production of intermediate inputs is higher in foreign countries.
- 12. Data 12 The World Input-Output Database (WIOD) (Timmer et al., 2012) EU KLEMS database (O’Mahony and Timmer, 2009)
- 13. The World Input-Output Tables 13 The world input-output table is an extension of the national input-output table which shows the use of products, being for intermediate or final use. The difference with the national table is that the use of products is broken down according to their country of origins. The world input-output tables cover 35 industries and various final demand categories in each of the 40 countries in the world for the period from 1995 to 2009. The WIOD is used to calculate the Leontief inverse matrix.
- 14. The EUKLEMS 14 The EUKLEMS provides data on economic growth and productivity for 25 of the 27 EU member states, as well as Australia, Canada, Japan and the U.S.
- 15. 2014-08-28Statistics Canada • Statistique Canada15 Country Origins of Intermediate Inputs Can US AU Japan EU ROW Share of intermediate inputs in gross output, avg 1995, 2000, 2007 46 45 51 47 48 52 Imported share of intermediate inputs, avg.1995, 2005, 2007 23 9 12 7 10 13
- 16. 2014-08-28Statistics Canada • Statistique Canada16 Standard vs. Effective MFP GrowthRegion Standard MFP growth Effective MFPG (ROW MFP =0) Effective MFPG (ROW = US MFP) 1995-2000 Canada 0.94 0.86 0.96 United States 0.85 0.92 1.01 Australia 0.97 0.89 0.98 Japan 0.31 0.27 0.31 European Union 0.38 0.35 0.44 2000-2007 Canada -0.04 0.23 0.34 United States 0.45 0.37 0.47 Australia -0.53 -0.20 -0.09 Japan 1.34 1.18 1.23 European Union 0.35 0.26 0.37
- 17. 17 Country Origins of MFP Growth, All Final Product, 2000-2007 Canada U.S. Australia Japan EU Total 0.23 0.37 -0.20 1.18 0.26 Canada 0.08 -0.01 0.00 0.00 0.00 U.S. 0.12 0.36 0.03 0.02 0.03 Australia 0.00 0.00 -0.26 -0.01 0.00 Japan 0.02 0.01 0.02 1.16 0.01 EU 0.02 0.01 0.02 0.01 0.22
- 18. 18 Country Origins of MFP Growth, Consumption, 2000-2007 Canada U.S. Australia Japan EU Total 0.20 0.43 -0.41 1.09 0.22 Canada 0.09 -0.01 0.00 0.00 0.00 U.S. 0.09 0.43 0.03 0.01 0.03 Australia 0.00 0.00 -0.47 -0.01 0.00 Japan 0.01 0.01 0.01 1.09 0.01 EU 0.01 0.01 0.01 0.00 0.19
- 19. 19 Country Origins of MFP Growth, Investment, 2000-2007 Canada U.S. Australia Japan EU Total 0.33 0.04 0.41 1.41 0.37 Canada 0.05 0.00 -0.01 0.00 -0.01 U.S. 0.22 0.01 0.03 0.03 0.04 Australia 0.00 0.00 0.34 -0.01 0.00 Japan 0.04 0.02 0.02 1.38 0.02 EU 0.03 0.01 0.02 0.01 0.32
- 20. 20 Country Origins of MFP Growth, Exports, 2000-2007 Canada U.S. Australia Japan EU Total -0.16 2.09 -1.25 2.48 0.78 Canada -0.42 -0.01 -0.01 0.00 0.00 U.S. 0.20 2.05 0.03 0.05 0.05 Australia -0.01 0.00 -1.30 -0.02 0.00 Japan 0.03 0.03 0.02 2.43 0.02 EU 0.03 0.02 0.02 0.01 0.72
- 21. Offshoring and MFP Growth 21 Effective MFP provides a decomposition of aggregate productivity growth into effects of material and service imports (or a part arising from production gains in service intermediate inputs and a part arising from the production gains in goods intermediate inputs). Overall, the contribution of service and material intermediate imports to aggregate MFP growth is small, but the contribution of material offshoring tends to be higher than the contribution of service offshoring.
- 22. Effective MFP by Detailed Products 22 Productivity gains in foreign countries made a larger contribution to MFP growth in the production of manufacturing products than in the production of non-manufacturing products.
- 23. Competiveness and MFP Growth 23 The authors estimate the correlation between MFP growth and decline in the price of products (which used to proxy international competitiveness. The effective MFP growth is found to be more closely related to the decline in output price than standard MFP growth.
- 24. Conclusions 24 The paper develops an effective MFP growth in an open economy that measures technical progress and productivity gains in the production of final demand products such as consumption, investment and exports. The measure of “effective” MFP captures the effect of productivity gains in all stages of production in the entire supply chain on productivity growth in the production of final demand products
- 25. Conclusions 25 A significant portion of MFP growth in the production of final demand originates from productivity gains in intermediate inputs in foreign countries, especially for small open economies. Technical progress in foreign countries has made a larger contribution to productivity growth in the production of manufacturing products than in the production of non-manufacturing products. Effective MFP is found to be more informative indicator of international competitiveness than the standard MFP.