Forecasting GDP growth can be a tricky task to undertake, especially when surrounded by illiquid market conditions and high levels of volatility. However, a way to simplify a GDP estimate is to look at how it is that a nation’s potential GDP lines up with its current GDP metric, and therefore demonstrates a capacity for growth. In order to accomplish this task, economists look at how it is that workers interact with technology and invested capital to create units of product.
These two factors are considered to be the biggest components of potential GDP, and therefore the actual long term supply curve of an economy itself, because of the way in which they represent both the productive capacity of a worker, as well as the nation’s ability to apply investment capital or savings into creating tangible returns.
The first step to evaluating the relationship with between capital investments into technology and worker productivity is to take a step back to visualize a workplace on its own. Specifically, we need to recognize how it is that incremental investments in technology will have a marginally diminishing return for the overall economy due to the complexity of the transaction itself. Essentially, workers need to take increasing amounts of time to learn how to use new technologies before they can start taking advantage of new capital investments to their full potential. As they learn how to use these new technologies through training, they become more valuable workers, and therefore require a higher wage to continue operating at their current level.
The end result is a time latency associated with training the workers, costs associated with training the workers, and then a continuing cost associated with both paying the workers more, and servicing the equipment going forward. That being said, in building up this technology base, there is also the possibility for the creation of additional industries that surround the servicing of these new technologies, which again improves the production of the economy as a whole.
For example, if heavy-trucks are introduced to a resource-heavy economy, the workers must first learn how to drive the new trucks, will require a higher wage once they have gotten good at driving the trucks, and then the companies will need to pay to maintain the trucks. After the trucks have become an industry standard technology, small companies might start to form that specialize in ordering parts in for specific models, or that improve the integrity of the trucks through upgrades. The end result is an incremental improvement in the overall growth of the economy itself, despite the initial cost setback.
We can now take this analysis a step further to look at how it is that a developing country that has invested into a technological improvement might not be placing itself in a comparatively advantageous position simply because of the investment being made. Specifically, we can compare the impacts of a technological investment on the ability of two smaller countries to determine if the increase in potential GDP will actually improve the overall growth of the country, or actually cripple it. Specifically, let’s look at a situation where two resource producing countries are competing for exports of a commodity.
One of these countries then invests into improving a railway so that companies can transport their extracted commodities for less cost. The issue to remember is that the savings associated with the scale of the railway line will then be associated with the ability of those commodity companies to actually take advantage of the new capacity of the railway line. This means that, in order for the country to see an increase in GDP as a result of the new railway line, there must be enough private investment capital sunk into the development of the actual resources to take advantage of the improved capacity.
If there is not, the country will experience a short-term decline, as the country takes measures to pay for the railway line without the increased revenues of the railway line. This will likely result in a currency devaluation over time. While such a decline in currency value will likely attract increased investor attention over time, and therefore improve the country’s ability to utilize its new railway line, it means that the final dollars earned on the line will be worth less than they would have been before, because the investment was made as a means of trying to improve supply without demand. As such, we can see how it is that increasing the potential GDP of a country does not necessarily improve its ability to grow its GDP by default. Context is always important.