Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Contribution of New Information Technology to the Growthof the Japanese Economy for 1974 - 85

Am Application of Input-Output Model and Productivity Analysis1
1
By
Tadashi Kuriyama* and Hajime Oniki**

Abstract

The development of new information technology for production and other activities (i.e.,
informatization) has been a major source of the growth of the Japanese economy since 1970s. The
present work is an attempt to measure the contribution of informatization. We develop an inputoutput method to decompose the value of produced goods and the capital stock into two
components: the part attributable to the development of new information technology and theremaining part. We apply this method to time series of the Japanese economy for the period

1974-85. By using the factor-productivity analysis to the decomposed time series, we find that ten
to twenty percent of the annual growth of the Japanese economy during this period was explainedby the development of new information technology and that, without such technology, per capita

national income of Japan in 1985 would have been lower than its actual level by approximately
twelve percent. The paper is the first part of the work, which is composed of two parts.

1. Introduction
The present work is an attempt to measure the contribution of new information technology to therecent growth of the Japanese economy. We first develop an 'accounting method' to decompose

the value of produced goods and the capital stock into two components: the part attributable tothe development of new information technology and the remaining part. An input-output analysis
is used for this. We apply this accounting method to time series of the Japanese economy for theperiod 1974-85. Second, by using the factor-productivity analysis to the decomposed time series,
we find that ten to twenty percent of the annual growth of the Japanese economy during this period

was explained by the development of new information technology and that, without suchtechnology, the per capita national income of Japan in 1985 would have been lower than its actuallevel by approximately twelve percent. This work comprises two parts: Part 1 deals with 'accounting' and Part 2 with 'productivity analysis.' The first part of the paper contains an explanationof the background of the work, an overall exposition of the method used, and a mathematicaldescription of the model. The second part presents empirical results.

Manuscript received January 8, 1992. Revised February 17, 1992.

*Department of Economics, Tohoku University, Sendai, Japan**Institute of Social and Economic Research, Osaka University, Osaka, Japan'Earlier versions of this paper were presented at the Eighth International Conference on Input-Output Techniques,
Sapporo (Japan), July 28-August 2, 1986, and at the Conference on "Asia's Experience in Informatization," Taipei(Taiwan, ROC) May 10-12, 1989. A shortened version was included in the Proceedings of the latter conference. A

nontechnical version was published in [8]. The authors are grateful to Professor Don Lamberton and a referee of this paperfor helpful comments.

Contribution of New Information Technology

25

The development of new information technology in Japan started in the early 1970s. It was led

by the invention of IC and LSI in U.S. Manufacturing of IC and LSI in Japan began by the middleof the 1970s; they were subsequently used for building NC-machines and robots. In the 1980s, newinformation technology spread to offices and homes in the form of personal computers, word
processors,facsimiles,

and

new

communicationequipment,

not

to

mentionmainframecomputers. There is no doubt that such changes increased the efficiency of the functioning of theJapanese society in general, and the aggregate productivity of the nation in particular, thereby
contributing to the growth of the Japanese economy.

The objective of this work is to measure this contribution numerically. In other words, it intends
to estimate the level of the national income at the present time which would have been realized
if there had been no development in information technology during the period in question.

The following is a rough sketch of the work. First, an input-output model of the Japanese
economy is constructed with two sectors, the new information sector (to be called the H-sector)
and the other sector (the Z-sector). By using the 'price-value-added version' of the input-output
model, the value of the output of each sector is divided into H-and Z-components.

Second, a time series of the real H-capital and the real Z-capital is constructed by using H-and

Z-price deflators, respectively. An economic characteristic of new information technology lies in
the rapid increase in the capability of the information device and the rapid decrease in its price;
our calculation shows that the real H-capital during the period in question increased 100-to

150-fold, contributing significantly to the growth of the Japanese economy. These are reported
in Part 1.

Finally, the annual growth rate of the Japanese economy is divided into H-and Z-components
to obtain the contribution of the H-sector (i.e., the new information sector). The theory ofmacroeconomic production function with productivity measurement (i.e., growth accounting) isused for this. This portion of the work is reported in Part 2.

The following is an outline of this paper. In Section 2, an informal explanation of the work is
given. Section 3 spells out in terms of mathematical equations the 'accounting' used in this paper.

Section 4 explains briefly the source of the data used. Section 5 presents our findings.

2. Outline of the Method
What is meant by the contribution of new information technology to economic growth? Thissection is devoted to answering this question.
We begin by observing that there are two routes through which new information technology may
increase the national income. First, new information technology has brought about the growth of

information industries such as the LSI industry, the computer industry, the telecommunicationsindustry, and the like. National income is the sum of the value added generated in all industriesof the society. The growth of the information industries was so rapid that the relative weight ofthe value added produced in the information industries increased significantly during the 1970s

and 1980s; the growth of national income owes much to the development of new information

technology in this sense.
Thus, we may define 'the contribution of new information technology to the growth of GNP'

to be the increase in the rate of growth of value added generated in the information industries.
This definition, however, is not satisfactory for the reason that it neglects the benefits of new
information technology to industries other than information industries.
To explain the point, suppose that, contrary to the reality, there was no information industry
in Japan and all informational products and services were imported from abroad. The national

26

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

income of Japan would be composed of the value added of which no portion was generated by

the information industries; the contribution of new information technology would be zero. Yet,the economy would have benefited greatly from imported informational goods and services. In
fact, such is the reality today in the Japanese database industry; a dominant part of the databaseservices used in Japan is 'imported' from the U.S.
It is clear from this consideration that there exist two ways through which the benefits of new

information technology are materialized: (1) supply-side effects, i.e., the increase in the national
income due to the increase in the value added generated in the information industries; (2) user
effects, i.e., the benefits of informational products and services enjoyed by the industries and theother sectors of the society. The user effects may be divided into two categories: measurable user
effects and external user effects.
The measurable user effects are the benefits of new information technology which directly
materialize into a reduction in the cost of goods or an improvement of the quality of goods. The

external user effects are the benefits of new information technology which are realized throughan overall improvement in social and economic systems. Roughly speaking, the measurable effects
come from the fact that new information technology contributes to improving the quality of goods
and services at the point where they are produced. On the other hand, the external user effects

arise from the fact that they improve the performance of social and economic systems as awhole.2
In the present work, we concentrate on the measurable user effects. It does not mean that theexternal effects are unimportant; on the contrary, they are important factors in explaining theeffects of new information technology on economic growth. We limit our attention to themeasurable user effects for reason of analytical convenience.3
To explain the measurable user effects, let us consider the case of automobile production. New

information technology affects automobile production through multiple routes, as is pointed out

below (See Figure 1). First, the motor of an automobile is controlled by LSI, a product of new
information technology; the operation of the motor is more efficient with LSI than without.
Second, robots, controlled by LSI and other devices, are used in assembling automobiles; they are
more accurate and cheaper than humans in doing mechanical and repetitive tasks, thereby

contributing to the improvement of the quality of assembled cars and the reduction of assembly
costs.

Third, when a new automobile is to be designed, engineers use workstations driven bysoftwares;4 their work is easier and more effective when they use workstations. Fourth, a new car
has to be tested repeatedly before it is put into mass production. Testing is done by experimentation and by simulation; for this, equipment controlled by IC, LSI, and general purpose computers
are used.
Fifth, new information technology contributes to the operation of the firm selling automobiles

through office automation (OA) and value-added networks (VANs). Orders from customers aretransmitted to shipment centers and eventually to factories producing automobiles. Without
2The external user effects may further be divided into two subcategories: external economic effects and external
noneconomic effects. The external economic effects come from efficiency improvements in economic systems such as
productive firms and markets and in the government from new information technology. Examples of the external
economic effects are introduction of electronic fund transfer and shopping by means of bulletin board systems (BBS). The

external noneconomic effects reflect improvements in public service systems, political systems, and other social systems
brought about by new information technology.

3The authors performed a preliminary estimation of the supply-side effects of new information technology (The work
was published in Japanese. See [4] and [5].).

4They are called CAD (computer-aided design) or CAM (computer-aided manufacturing).

Contribution of New Information Technology

27

Unite price of a c

Parts and materials

Design and tests

J Assembly and other services!

Management, marketing, and sales; Others

Costs of usino
robotsCosts of using

ZkVlCAM for
designing

Costs of testingand simulations

Costs of using
using PC

VAN services

Figure 1 Division of the Unit Price of a Passenger Car into Information and Other Components

electronic devices, orders would have to be processed by humans with written instructions andtelephone calls, thereby causing costly delays and errors. Sixth, computers may be used for
demand forecasting, marketing, and sales promotion; the management and operation of a firm
is greatly improved by new information technology. Finally, one can point out that new inform
ation technology is also useful in training workers and managers.

Thus, new information technology contributes to the production and the distribution of
automobiles at different levels and in different ways. LSI in the motor of a car improves its
performance and adds to its value. Robots used for automobile assembly reduce the cost by
substituting for expensive human labor. These are typical examples of the measurable user effects.
On the other hand, new information technology used to facilitate the functioning of automobile

markets provides benefits to both producers and users of automobiles. This is a case of the external

economic effects, as the benefit of improved markets cannot be traced in the form of cost
reduction or quality improvement of individual automobiles. The objective of this paper is toaggregate the measurable user effects of new information technology into a small number ofindicators so that we may conceptualize about the magnitude of the effects. This objective ispursued by utilizing input-output relations and 'real' economic variables.
In order to isolate the contribution of new information technology, we will divide the value ofgoods and services, the value of capital stock, and the wage payment into two components, one

corresponding to new information technology, and the other corresponding to technology otherthan new information technology. In reality, however, the two components may not be

distinguished physically. For example, an automobile has LSIs attached to its motor. A motor iscomposed of iron and other materials, of which the production relies directly or indirectly on new

information technology. Furthermore, the effects of new information technology are not always

visible; frequently, it is hidden in the cost and the quality of a car in the sense that the cost is lower
and the quality higher with the help of new information technology.
From this observation, we are led to the following strategy to measure the contribution of new

information technology. Whether visible or invisible, tangible or intangible, we express the effects
of new information technology by looking at the composition of the value of a commodity. We

28

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

The price of a passenger car
..-•■

■••..

..-■■■'"■■•...

The cost of using robots

The price of robots

The price of softwares for robots

The cost of using a workstation

for writing robot softwares
The price of workstations.......-•■■■-....•■•--■■■-•■■■-...

""■■■■■-•■-....

The price of LSI in workstations

The cost of using facilities

for LSI production

The price of facilities for LSI producon

Figure 2 Information Components in the Price of a Passenger Car Traced Backward

do this for the reason that the cost, i.e., the money element, is the only attribute transferable fromone commodity to another; the cost factor is the only 'carrier' of the effects of new information
technology (See Figure 2).

Thus, the present paper concentrates on tracing the effects of new information technology bycomputing the cost of a commodity. We divide the nominal value of a commodity into two parts,

to be called H-and Z-components, respectively, and treat each of them distinctly.5 The nominal
value spent on the H-component of a commodity is affected by a rapid improvement in its quality
and a rapid decrease in its price; the 'reaP outcome from a nominal amount of money spent on
the H-component is increased because of new information technology. In the present work, we

use a single price-quality index for the H-(or Z-) component, rather than a price index and a quality
index constructed separately; our index expresses the amount of money needed to purchase a unit
able to find a way out other than by using certain simplifying procedures in obtaining suitable
data. In the future, however, when data with quality specifications are available, we may be able

to use a more accurate estimation procedure than the one presented in this work.

5As presented more formally in the following section, there will be two types of goods, the H-good and the Z-good.
Likewise, there will be two types of capital stock, the H-capital and the Z-capital. We also consider two types of labor,

the H-labor and the Z-labor. The H-component of labor is that part of the productive factor which has the skill of working
with the H-capital, and the Z-component is that part which does not have such skill. As this assumption on labordecomposition may be problematic, we will present three models each with different ways of decomposing the labor.

Contribution of New Information Technology

29

3. The Mode!
This section explains the model which we will use for the 'accounting.' As outlined in the preceding

section, we start with a presumption that the whole economy is divided into two productive
sectors, the new information sector (the H-sector) and the other sector (the Z-sector). The output

produced in the H-(or Z-) sector is called commodity H (or Z). It is possible to formulate a generalmodel with n sectors; the two-sectoral framework is used here because of the limitation ofavailable data.
First, we present the notation. We use the letters H or Z to identify the component containedin a commodity or in a factor of production, as well as to identify a sector of the economy. We
consider three factors: the real capital stock, the labor force, and the 'research and development

expenditure5 expressed by the variables K,L, and R, respectively. Each of the two commodities
and each of the three factors contain both H- and Z-components.

In summary, definej:index of a sector (/ = H,Z);/:

index of output (/ = H,Z), or(1)

index of a productive factor (/ = K,L,R);m:

index of a component of output or of a factor (ra = H,Z).

These variables will be used, for example, in input coefficients, a(/,y), of commodity / at sectory(/ = H, Zj = H,Z). Note that there are four coefficients a(/J). We postulate that the values of acommodity are divided into H-and Z-components according to the way in which the values of thefactors are divided into H- and Z-components (see equation (13) below). Further, we assume that,when a commodity from one sector is used for investment, the H- and Z-components in theinvested good are distributed proportionally to the value of the good invested in the H- and Zsectors (see equation (16) below).

The following is a list of variables to be used in this paper:t:time period (t = 0,1,2,(i) exogenous data (t= 1,

,T)

(2)

, T; /=H, Z or / = K, L, R;y = H, Z; m = H, Z):a (i,j,t):

nominal input coefficient of commodity / in sector j;v (ij,t):nominal value-added coefficient of factor / in sector j;h(i,f)\

nominal investment of commodity /;b(i,j,t):the proportion of the investment distributed from sector / to sector j to thetotal investment produced at sector / (the investment coefficient);6q(m,t):

price of the m-component of investment (the deflator of the m-investment);

d(m,t):

the rate of depreciation of the m-capital stock;l(j>m>t):the m-labor force in sector j\w(m,t):

the wage rate of the m-labor force;x(K,t):

the aggregate nominal income distributed to the owners of capital stock(aggregate profit);(ii) the initial condition (/ = 0 only):

6Note that the investment coefficient used in this work is different from the capital coefficient used in dynamic Leontief
models; the latter is a capital — output ratio, whereas the former indicates a proportion of investment.

30

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

k(j,m,0):

the initial m-capital stock;q(m,0):

the initial price of the m-capital stock;(iii) data to be estimated (/= 1,,T):/•(/):

the average rate of return;e(i,m,t):the proportion of m-component in the unit price of commodity /;hh(j,m,t): nominal gross m-investment in sector y;kk(j,m,t): real gross m-investment in sector y;k(j,m,t):real m-capital stock in sector y;p(m,t):

price of the m-capital service (the rental of the m-capital stock);pk(j,m,t): the proportion of m-component in the value added originated in sector j andwas distributed to capital;

wl(j,m,t): the proportion of m-component in the value added originated in sector j andwas distributed to labor;vv(i,m,t): nominal value-added coefficient of m-component in factor /;v(ij,m,t): nominal value-added coefficient of m-component in factor / in sector y.

To evaluate the H- and Z-components of output and investment, we consider the price of invest
ment good q(m,t) and the price of capital service p(m,t). In order to take into account quality

improvement in the investment good, we define itys price q(m,t) as the amount of money to be
paid for a unit of productive capacity of the m-investment good, rather than a physical unit. As
a consequence of the advancement of information technology, the price of the H-investment good,q(H,t), decreased significantly during the period in question. This is a consequence of two factors:

a rapid decrease in the price of information commodities and a rapid improvement in the qualityof information commodities.

In order to obtain the price of capital services, p(rnt f), we use the following equation (Jorgenson
and Griliches [7]):p(m, t) = q(m, t){r(t) + d(m, t)]-[q(m, t)-q(m, t-l)},(3)x{K, 0 = 2 2 {(4 (m, t) (r(t) + d(m))-(q(m, t)-q(m, t-\))) k{j> m, t)).
jm

The first equation of (3) indicates a subjective equilibrium condition of an agent who acquires

a unit of m-capital stock and rents it to the user. The left side is the cost of purchasing a unit of
the m-capital stock. The first term on the right side is equal to the interest cost and the depreciation
allowance, whereas the second term is equal to the capital loss (i.e., the negative of the increasein the price of capital stock). The equality between the left and right sides implies that the marginal
net revenue from purchasing and renting a unit of the m-capital stock is equal to zero, a necessary
condition for equilibrium. The average rate of return, r(/), is calculated by solving the second

equation for r, which states that the return to the owner of the entire capital stock is equal to thetotal profits.

To decompose the output price into two, we first calculate the proportion of each component
in the value added of sector j distributed to capital and labor:(y, m, t) = w (m, t) I {j, mf t)/^ w (n, t) I (/, /i, 0,(4)

Contribution of New Information Technology

pk (/, m, t)=p (m, t) k (A m, t)/J]p (n, t) k (j, n, t)J

31

(5)

n

Further, we need to decompose the value-added coefficients. As indicated in the following
equations, (6) and (7), we calculate the value added coefficients v(ij,m,t) by dividing the coefficientsv(LJ,t) and v(KJ,t), using the results from equations (4) and (5).

v (L, j, m, t) = wl (j, mt t) v (L, j, 0,(6)v (K, j, m, t)=pk (y, m> 0 v (K, j, t)9v(R,H,H, t) = v(RtHf 0,(7)

v(R,H,Z9 0 = 0,v(R,Z,H, /) = 0,v(R, Z, Z, t) = v(R, Z, 0.

Equation (6) is used to decompose, e.g., the wage coefficient of the ./"-sector, v(LJ,t), intov(LJ,H,f) and v(LJ,Z,t), y = H,Z.8 As is seen from equation (7), we make a special assumption
regarding the value-added coefficients for the research and development expenditure. We assume

that the entire research and development value added in the H-sector is composed of the Hcomponent, whereas the one in the Z-sector is composed of the Z-component.9
We next proceed to calculate the proportion of H- and Z-components in the unit price of thecommodity produced in each sector. To do this, we use the value-added price version of the Leontief

input-output model with the input coefficients a(ij,t) and the value-added coefficients v(ij,t) andv(/jj,/w,/), all defined in nominal terms. Furthermore, we define the unit of each commodity to bethat quantity of the commodity which can be purchased for a unit amount of money; accordingly,
the price of each commodity is equal to one.
To explain, we start with the following equation:(W, «*> 0 = 1,(8)which states that the total cost of producing a unit amount of commodity / is equal to its price.
The first term on the left side is the cost arising from intermediate inputs, whereas the second termis the total value added. The right side of this equation is simply the price of this commodity, as
stated above. It is noted that the first term contains two input coefficients, whereas the second term
has six value-added coefficients. Let us next define new value-added coefficients by

vv (/, m, 0 = Yj v ('> i> m> 0-(9)7Note that w/ (J. H, t)+wl <J, Z, t)=\ and pk (j, H, t)+pk {J, Z, t)=\. Also note that the variables k {J, m, t) and /(y, m, 0 stand forproductive factors in which quality changes are taken into consideration. Take the labor force, forexample. When the number of workers and length of the workweek are unchanged but the quality of the labor service

is improved, the labor input 1, {j, m, /), is increased. In other words, an improvement in the quality of labor service isconsidered to be equivalent to an increase in the number of workers, or to an increase in length ofthe workweek, without
a quality change.

8Observerve that, equations (4), (5), and (6) are a device to calculate v (L, j, m) and v (K, j, m) without having nominal
value consistent with price and stock data.

9In fact, equation (7) 'defines' the two sectors H and Z; the H-sector is defined to be the collection of productive
activities with the research and development expenditure devoted solely to the production of the H-component, and theZ-sector is simply the collection of the rest of the economy.

32

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

By using (9), equation (8) reads

2>(W, 0 + 2>v(A m> 0=1.

00)

We manipulate equation (10), obtaining

S e (/, 0 [D (/, J)-a (/, j, t)] = £ w (/, m, /),(11)<? a o=S (Svv ("»w- f»aa («• •/'» ')•nmwhere aa(nj,f) is the (AiJ)-element of the inverse of matrix (I-A), A is a 2x2 matrix of which thetypical element is a(ij,t), e(i,t) = \(i = U,Z)y and D(/J) is the Kronecker delta, so that D(/,/)= 1,

The variable e(jtmj) stands for the proportion of the m-component in the unit price of com
modity j. We define this by the following equation:e a wi, /)= S vv (/i, m, t) aa (n, j, /),(13)

Se(A m' 0 = e(js 0=1,

(14)

where

as is derived from equations (12) and (13). Equation (12) states that the price of the commodity,

which is equal to unity as assumed above, may be obtained from the value-added coefficientvv(Jimit) by adding up the direct and indirect cost elements. Observe that the additive operations
performed on the right side of equation (12) can be divided into two steps, of which the first is
used in equation (13) to define the price composition coefficient, e(j>rnJ)The next step is to calculate the real investment and the real capital stock of each component

in each sector. Note that the investment coefficient b{ijj) stands for the proportion of thenominal investment of output / directed to the capital accumulation in sector j to the total
production of nominal investment in sector /; accordingly,

2>(W, 0=1.
j

(15)

The gross nominal m-investment, hh(j,m,t), is computed from the nominal investment of com
modity i,h(i,t), by using the coefficients e(m,i,t) and b(ij,t):hh (Js /w, 0 = S * ft J' 0 e (i, m, t) h (/, t).

(16)

The real gross investment, kkU>m,t), is obtained by applying the deflator p(m,t):kk U, m, 0 = hh (/, m, t)/p (m, t).

(17)Now, the real capital stock at the beginning of the following period, kU,m,tl), may be obtained byk (A m, t+ l) = (1.0-tf (m, 0) * (/, m, t) + kk U, m, 0,
C/ = H, Z;m = H, Z;/=l, ...., T).

(18)

Contribution of New Information Technology

33

All of the steps explained above are designed in such a way that, starting from the real capitalstock at the beginning of period t,k(j,m,t), we perform a number of operations to end up with thereal capital stock at the beginning of the following period, k(J,rn>t+ 1). Therefore, if we are given
data for the exogenous variables, the initial capital stock, k(j,m,0), and the initial price ofinvestment good, q(m,0)(\.e., the variables in (i) and (ii) as defined above), then we shall be able
to compute all variables in (iii).

The objective of the computation explained in this section is to obtain a time series of the realcapital stock for sectors H and Z and for components H and Z; i.e., to obtain four series of thereal capital stock. To do this, we used the Leontief price model for calculating the cost of eachcommodity to obtain H- and Z-components, and derived the nominal investment for each of thetwo components distributed into each of the two sectors, H and Z. We then obtained the real capitalstock from the real investment data. We call this procedure the 'H-capital accounting.'

4. Description of the Data
This section gives a brief description of the exogenous data which were used to generate time seriesof the H- and Z-components of the produced good, the capital stock, and the labor input. A
detailed explanation of the source of the data and the way we handled them are given in an
appendix to be published separately. Definitions of the exogenous data were stated in (2) of thepreceding section. Below, to explain the source of the exogenous data, we follow the order in which
the variables are listed in (2).
4.1. Time Period

We used annual data for the Japanese economy from 1973 to 1985. The year 1973 was taken to

be the initial period (/ = 0), so that we have a sample period of 12 years, from 1974 to 1985. The

development of new information technology was accelerated after 1985; its contribution to thegrowth of the Japanese economy should be much higher after 1985 than during the sample period.

Lack of input-output tables after 1985 precluded us from considering a period beyond the year
1985.
4.2. Sectors

As is explained in the preceding section, we used a two-sectoral framework of the aggregate

Japanese economy to estimate the contribution of new information technology. The first sector,

the H-sector, is defined to be a collection of industries which are heavily driven by such tech
nology. From the industries in the endogenous sector of the Japanese input-output tables, weselected the computer industry, the semi-conductor industry, the telecommunications industry, theinformation service industry, and other related industries, to form the H-sector. All of theremaining industries in the endogenous sector, except the research and development industry, areaggregated into the Z-sector. It is noted that our definition of the H-sector is one of the narrowestof this kind; for instance, we excluded from the H-sector the machinery industry, which produces
NC-machines and robots.
4.3. Input-Output and Value-added Coefficients

Input-output coefficients(a(ij,t))and value-added coefficients(v(i,j,t)) are obtained byaggregating input-output tables of the Japanese economy.10 Observe that the input-output matrix
l0See Applied Research Institute [1] and Ministry of International Trade and Industry [8].

34

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

is 2 x 2(i = H,Z;y = H,Z), whereas the value-added matrix is 4 x 2 (/=K,L,R, and the other primary
inputs; y = H,Z). It is noted that a fourth factor (the other primary inputs) appears in addition to
the three primary factors mentioned in the preceding section (/=K,L,R). The additional input iscomposed of non-household consumption (producers' consumption spending not related to theirproduction activities) and indirect taxes minus subsidies. The data for the research and develop
ment expenditures are obtained by transferring the research and development industry from thejendogenous sector to the exogenous sector.

4.4. Nominal Investment and Investment Coefficients

Nominal investment of commodity i(h(i,t))(i = H,Z)9 a component of final demand, is obtained
from the input-output tables. Further, the investment coefficients (b(ij,t)) is estimated by theauthors from capital stock data.
4.5. Price Indexes and the Rate of Depreciation

As is explained in the preceding section, our strategy is to divide the nominal cost of a produced
good into H- and Z-components and to obtain the 'real' value of each component by deflating
the nominal value by using a price index. To do this, we need a price index for each of the H- andZ-components. We use the imputed deflator of the gross national product as the price index of
the Z-component (q(Zj)). On the other hand, the price index of the H-component (q(H,t)) wasconstructed from a conventional price index and certain quality indicators, as is explained below.
The price index of a manufactured good does not consider improvement in the quality of thegood. The wholesale price index of, say, electronic devices is obtained by aggregating the nominal
price in each year of those products classified as electronic devices (i.e., the basket). Consider TV
sets, for example. The quality of TV sets was constantly improved during recent years. However,as long as TV sets are classified as an item of electronic devices, i.e., as long as TV sets remain

as an item in the basket of electronic devices, the current nominal price of TV sets is used to
produce the price index of the electronic products without considering the improvement in thequality of TV sets. Therefore, improvement in the quality of TV sets is not represented by the priceindex of electronic devices. (This would be avoided if we could revise the commodity classification
so that TV sets of high quality were distinguished from TV sets of low quality, but this was

impossible because of the lack of data.)
Thus, during the perriod 1982 to 1986, the nominal price of a TV set in Japan decreased by 13%,

according to the report on the wholesale price index published by the Bank of Japan.11 In fact,
however, tremendous quality improvements were achieved during this period; intuitively, theimpact of these quality changes far exceeded that of the decrease in the nominal price. In short,the price index reported in official statistics does not consider quality improvements and, for our
purpose, is not of much value.

For this reason, we estimated our own price index of the H-component from the price of com

puters; we did this by adjusting the nominal price of mainframe computers by means of a hedonicindex method. In particular, we regressed the nominal price of newly leased mainframe computerson two quality indicators, the speed of CPU and the memory size, as well as a time trend:log (P)= 13.635 + 0.5813 log (MIPS) + 0.4187 log (KB)-0.1913 t9(239.3)R2 = 0.92, SE = 0.56,"See Bank of Japan [2].

(668.6)(19)

Contribution of New Information Technology

35

where P stands for the nominal price of new computers, MIPS (million instructions per second) for
the speed of CPU, KB (kilobytes) for the size of memory, t for the time period, and log(.) for thenatural logarithmic function. T-values of estimates are shown in parentheses.12 It is seen that theprice of new computers with quality held constant decreased at an annual rate of 19%. We set theprice #(H,/) by<7(H, O = Qoe-01913',(20)

where Qo denotes the base-year price.

The price index of the H- and Z-components is included in Table 1 and Figure 3. It is immedi
ately seen that, whereas the Z-price increased steadily during this period (the average annual rateof change being 3.5%), the H-price decreased tremendously. The ratio of the 1973 to the 1985 Hprice is as high as 30. In other words, an amount of 1000 yen spent on the H-product in 1985 is,in effect, 30 times greater than the same amount of money spent on the H-product in 1973. We
consider this to be a major source of economic growth due to the advancement of new information
technology.
4.6. The Rate of Capital Depreciation

The difference in technological progress and that in price reduction between the H- and Zcomponents is related to the rate of depreciation of each type of capital stock, as is demonstrated
by equation (3). Since no systematic data for depreciation of each component is available (dataavailable from financial reports are useless because they are based on taxation rules, not economicor engineering facts), we assumed that, on average, the length of time for a product to depreciate
to 10% of the original value is 12 years for the Z-component and 6 years for the H-component. The

corresponding rate of depreciation is equal to 7% and 15% per year, respectively, for the Z- andH-components. The reason that the H-product depreciates much faster than the Z-product is that,

because of rapid technological progress and competition, the H-product becomes obsolete a few
years after it is purchased, even though it is still usable.
4.7. Labor Input and the Wage Rate

The most difficult problem in preparing data for our work arises when a definition of H- and Z-

components of the labor input is to be chosen. It is intuitively clear that, at each step of production(e.g., automobile assembly), a part of labor service (that for operating and maintaining assembly

robots) is combined with H-type capital equipment (robots) to produce an output with Hcomponent (automobiles assembled with robots, as distinct from automobiles assembled manually).

During the process in which new information technology is adopted, the quality of the labor service
is improved through education, training, and learning; the H-component of labor input is increased
accordingly. It is not straightforward, however, to give a definition in which labor input may beclassified into one of the H- and Z-components. Since the "production of human capital" is notincluded in the input-output relation of this model, the labor input cannot be divided in the same
way as is the capital stock. We need to use some proxy to represent the H- and the Z-componentsof the labor input. In fact, there are several ways of defining H- and Z-components of labor, andthe final results depend significantly on the choice made.

For this reason, we consider three alternative definitions of H- and Z-components of the labor
12Equatioi* (19) was estimated with the assumption of linear homogenity; the coefficient of log (KB) is the difference of
1.0 and the coefficient of log (MIPS).

36

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

input, and these correspond to three models, called Models A, B, and C.
In Model A, we assume that all labor input is composed of the Z-component only; we assume

away the H-component entirely from the labor input. This means that the research anddevelopment is the only source of the H-component and the contribution of new information

technology is achieved solely through improving the quality of the capital stock. Thus, this model
gives a lower bound to the estimate of the contribution of new information technology.

In Model B, wages and salaries are divided into H- and Z-components according to the job
content of workers; wages paid to system engineers, programmers, machine operators, andkeypunchers are classified as being composed of the H-component only. This presumes thatcomputer operation requires new skills to be obtained from education and training. In this model,
we assume, in effect, that the labor input of H-type workers is indispensable for the H-capital tobe productive. The cost of the H-capital and the H-labor becomes, in parallel, a part of the Hcomponent of the price of the commodity.

Model C is the same as Model B except that the range of the H-type worker is taken to be muchgreater than in Model B. In Model B, the H-type worker is a computer specialist. In Model C,
a part of nonspecialist labor is also included in the H-component. We consider the hours of office
workers devoted to handling informational devices as the H-component of labor input. For this,we used data collected by the Japan Office Automation Association.13 This study reports data on
the hours that clerical and office workers spent in handling general purpose computers, officecomputers, personal computers, wordprocessors, and on-line terminal equipment. We may statethat the effects of office automation is taken into consideration in this model.

5. Findings
In this section, we briefly present the results we obtained from the model explained in section 3
and the data explained in section 4. Because of the limitation of space, we will not show here all
the results we calculated; we have selected time series which are useful for us to understand therelative magnitudes of the two sectors, and the differences in the rate of growth of the twocomponents, during the period 1974-85.

First of all, the price of the capital service of each component, p{mj), is calculated from theprice of the investment good, i.e., the price of the newly produced good, q(m,t). The price data

are shown in Table 1 and are depicted in Figure 3. It is seen that the price of the Z-component
increased slowly during the period 1973-85 at the rate of 2% each year. On the other hand, theprice of the H-component decreased at the rate of 32% each year, which means that the pricebecame approximately one-thirtieth at the end of the 12-year period. In other words, because of
the progress in new information technology in Japan during this period, the efficiency of the Hcomponent in 1985 is 32-times greater than that in 1973.

Next, by using the price of capital services, we divide the value-added generated by the capitalstock into H- and Z-components for each year of this period, as shown in equation (4). The valueadded generated by labor is divided into the two components by means of equation (5). As

explained in the preceding section, however, we considered three alternative definitions to do this
and, hence, we obtained three alternative results in decomposing the produced good and thecapital stock.

Tables 2A, 2B, and 2C show the decomposition of a produced good in the H- and Z-sectors into
the two components for Models A, B, and C, respectively. In Model A, where the contribution
13See Japan Office Automation Association [6].

Contribution of New Information Technology

37

Table 1 Price Index of H- and Z-Components (1980 = 1.00)
Price (H)Price (Z)1973

3.28770.90441974

3.34870.82041975

1.58390.82121976

1.66050.88481977

1.90370.93171978

1.09541.02221979

1.51051.01881980

1.00001.00001981

0.36271.02041982

0.20811.02941983

0.26891.03911984

0.22141.08961985

0.1176

1.1496

4

3.5

3

2.5

—v

":

\\

2

V

1.5

v

1

0.5

n

-

i

i

i

I

I

I

I

1973

1974

1975

1976

1977

1978

1979

PRICE(H)

1980

1981

1982

1983

1984

1985

PRICE(Z)Figure 3 Price Index of H- and Z-Components (1980 = 1.00)

of the H-type labor is defined to be minimal (i.e., zero), most of the cost of the produced goodin the H- and Z-sectors is composed of the Z-component. On average, the H-component occupies
2.9% in the H-good, and only 0.2% in the Z-good, as seen from Table 2A.
Table 2B summarizes the results obtained for Model B, in which the contribution of the H-type

labor is considered from those who are professionals in computers and communications. The
weight of the H-component for this case is calculated, on average during the period 1973-85, tobe 7.4% in the H-good and 1.2% in the Z-good.

The results obtained for Model C, in which the contribution of the H-type labor comes not only
from information professionals but also from nonprofessionals in information during the period
they work with the H-type equipment like personal computers and wordprocessors, are shown in
Table 2C. For this model, the H-component is calculated, on average, to be 8.2% of the H-goodand 2.5% of the-Z-good.

38

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Table 2A Composition of a Unit Price of a Commodity (Model A)
E(H, H)

E(Z, H)

E(H,Z)

E(Z, Z)

1973

0.02300.97700.00090.99911974

0.02510.97490.0014

0.99861975

0.02920.97080.0016

0.9984

1976

0.02590.97410.00180.9982

1977

0.02750.97250.00200.99801978

0.02800.97200.00180.9982

1979

0.02930.97070.00230.9977

1980

0.0316

0.96840.00250.99751981

0.0314

0.96860.00220.99781982

0.03120.96880.00230.99771983

0.03180.96820.00300.99701984

0.03200.96470.00320.99001985

0.03140.96180.00290.9833AVR

0.02900.97020.0021

0.9963[E(m, j) = the proportion of m-component in good j]

Table 2B Composition of a Unit Price of a Commodity (Model B)
E(H, H)

E(Z, H)

E(H,Z)

E(Z. Z)

1973

0.05170.94830.00530.99471974

0.06190.93810.0077

0.99231975

0.07080.92920.00850.99151976

0.07060.92940.00970.99031977

0.07250.92750.01110.98891978

0.07390.92610.01040.9896

1979

0.07540.92460.01300.98701980

0.07540.92460.01390.98611981

0.07650.92350.0126

0.98741982

0.07810.92190.0126

0.98741983

0.08280.91720.0151

0.98491984

0.08510.91160.01590.9774

1985

0.08460.90860.0144

0.9718AVR

0.07380.92540.0116

0.9869[E(m, j) = the proportion of m-component in good j]

Table 2C Composition of a Unit Price of a Commodity (Model C)
E(H, H)

E(Z, H)

E(H, Z)

1973

0.05170.94830.00530.99471974

0.0626

0.93740.00920.99081975

0.07250.92750.01240.9876

1976

0.07340.92660.01590.98411977

0.07740.92260.02000.98001978

0.07980.92030.0211

0.97891979

0.08440.91560.0274

0.97261980

0.08730.91270.03150.96851981

0.08860.91140.03120.96881982

0.09070.90930.03290.96711983

0.09890.90110.03990.9602

1984

0.10200.89470.04180.9514

1985

0.09920.89400.0381

0.9481

AVR

0.08220.91700.0251

0.9733[E(m, j) = the proportion of m-component in good j]

E(Z, Z)

Contribution of New Information Technology

39

The annual investment in nominal terms from the two sectors, h(i,t), is rearranged into the grossnominal m-investment hh(j,n,f)y by using equation (16). The real gross investment kk(j,^yt) isthen calculated from equation (17).

The real capital stock divided into H- and Z-components for each of the H- and Z-sectors is
obtained by equation (18). The results are given in Tables 3A, 3B, and 3C, corresponding toModels A, B, and C, respectively. Graphs for the capital stock are given in Figures 4A, 4B, and 4C.

It is seen that, for the three Models, A, B, and C, the Z-component of the capital stock in 1980

yen increased approximately 70% during the period 1973-85. The Z-component of the capitalstock is less for Model B than for Model A, and it is also less for Model C than for Models A andB, but only slightly. The H-component of the capital stock in 1973 is almost zero because we

assumed that the initial value of this capital stock at the end of the year 1972 is zero. The rate of
growth of these data for the period 1973-85 differ greatly between Models A, B, and C, because,in Model A, the source of the H-component is limited to the research and development

expenditures in the H-sector, whereas in Models B and C, the H-component is generated not only

Table 3A Capital Stock (H, Z) in Trillion Yen (Model A)
CapitalCapital

(H)

(Z)

1973

0.05

243.32

1974

0.14

259.371975

0.22

271.791976

0.29

284.211977

0.44

298.751978

0.59

317.02

1979

1.03

337.47

1980

2.22

354.35

1981

3.64

371.241982

4.81

385.871983

6.80

396.541984

9.81

407.01

1985

11.61

417.80

Table 3B Capital Stock (H, Z) in Trillion Yen (Model B)
CapitalCapital

(H)

(Z)

1973

0.23

243.03

1974

0.60

258.751975

0.92

270.861976

1.28

282.961977

1.99

297.121978

2.66

315.03

1979

4.73

334.991980

9.82

351.38

1981

15.46

367.87

1982

19.85

382.13

1983

27.41

392.35

1984

38.80

402.37

1985

45.68

412.80

40

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

Table 3C Capital Stock (H, Z) in Trillion Yen (Model C)

CapitalCapital

(H)

(Z)

1973

0.23

243.03

1974

0.67

258.681975

1.14

270.621976

1.78

282.45

1977

3.07

296.21

1978

4.47

313.63

1979

8.66

332.88

1980

19.24

348.48

1981

31.57

364.18

1982

41.69

377.65

1983

58.90

386.97

1984

84.31

396.08

1985

98.86

405.83by the research and development expenditure but also by the H-type labor. In Model A, the H-

component of the capital stock at the end of 1985 is less than 1/40 of the Z-component, while inModel C, it is close to 1/4 of the Z-component.

It is seen that the H-capital stock rose significantly in constant prices relative to that in current
prices. As is stated previously, this indicates the rapid progress in new information technology

expressed by quantitative increases in the capital stock measured in constant prices. One can saythat the model is used to convert the progress of new information technology, a qualitative
phenomenon, into the increase in the H-capital stock, a quantitative indicator.

1973

1974

1975

1976

1977

1978

1979

1980

CAPITALCAPITAL

(H)

(Z)

1981

1982

1983

Figure 4A Capital Stock (H, Z) in Trillion Yen (Model A)

1984

1985

Contribution of New Information Technology

1973

1974

1975

1976

1977

1978

1979

1980

CAPITALCAPITAL

(H)

(Z)

1981

1982

1983

1984

1985

Figure 4B Capital Stock (H, Z) in Trillion Yen (Model B)

500

400

300

200

100

1973

1974

1975

1976

1977

1978

1979

I

i

i

I

I

I

1980

1981

1982

1983

1984

1985

CAPITALCAPITAL(H)(Z)

Figure 4C Capital Stock (H, Z) in Trillion Yen (Model C)

41

42

Journal of Applied Input-Output Analysis, Vol.1, No.l, 1992

References[1] Applied Research Institute (1987), Conjunction Tables of Input-Output Relations of Japan, Tokyo:
Applied Research Institute, (in Japanese).

[2] Bank of Japan, Department of Research znd Statistics (1988), Price IndexesAnnual, Tokyo: Bank of Japan.
[3] Denison, E.F. (1962), The Sources of Economic Growth in the U.S. and the Alternatives Before Us,
New York: Committee of Econ. Development.

[4] Economic Planning Agency (1985), A Quantitative Approach to Informatization: Economic Analysis

and Indexation of Information of the Japanese Economy. Tokyo: Bureau of Publications, Ministry of
Finance, the Government of Japan, (in Japanese).

[5] Economic Planning Agency (1986), Information of the Japanese Economy-Estimation and Forecast of
Electonic Information Production by Industries, Bureau of Publications, Ministry ofc Finance, theGovernment of Japan, (in Japanese).

[6] Japan Office Automation Association (1987), Survey on Office Automation, Tokyo: Ministry ofInternational Trade and Industry, (in Japanese).

[7] Jorgenson, D.W. and Z. Griliches (1967), "The Explanation of Productivity Change," Rev. of Econ.
Studies, Vol. 34, pp. 249-283.

[8] Kuriyama, T. and H. Oniki (1991), "Measuring Impacts of New Information Technology on the Growthof the Japanese Economy: 1974-85," Keio Communication Review, No. 12 (Special Issue), pp. 9-32.
[9] Ministry of International Trade and Industry (1988), Input-Output Tables of Japan, Tokyo: Bureau of
Administrative Management (Gyosei-Kanricho), (in Japanese).

[10] Solow, R.M. (1957), "Technical Change and the Aggregate Production Function," Review of
Economic and Statistics, Vol. 39, pp. 312-320.