World Bank IMF and Dev Agencies | |
World Bank IMF and Dev Agencies | |
2220 VIEWS | |
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Over the past three decades, the prices of
machinery and equipment have fallen sharply relative to overall
prices. Rising trade and sweeping technological improvements have led to
more efficient production of capital goods. This has helped countries around
the world raise real investment and improve living standards.
However,
trade tensions and sluggish productivity growth could slow the decline in the
relative price of machinery and equipment, which would hold back investment
growth worldwide.
Our
chart of the week from the April World Economic Outlook shows
that since 1990, the price of machinery and equipment relative to the price of
consumption fell about 40 percent in emerging market and developing economies.
In
advanced economies, the price drop was even higher—around 60 percent. These
were dramatic declines when compared with the prices of other types of capital
assets, such as housing and commercial structures, which more closely tracked
the price level of consumption.
According
to the IMF’s research, international trade has been the biggest factor behind
falling prices of machinery and equipment relative to the price of consumption.
And the decline in the price of capital goods, in turn, provided a sizable
boost to real investment.
The
IMF’s analysis reveals that, for the average emerging market and developing
economy, about one-third of the increase in the real investment rate in
machinery and equipment in the past three decades can be attributed to the
cheapening of capital goods relative to consumption. Stronger macroeconomic
policies and other factors contribute the rest.
For all
economies, avoiding protectionist measures and reviving trade liberalization
would help maintain the pace of decline in the relative price of capital goods.
This would also provide a boost to the lackluster investment growth in advanced
economies and support the capital deepening still very much needed in
developing countries. Promoting innovation in the capital goods producing
sector in both advanced and emerging market and developing economies is also
crucial.
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