The role of ICT productivity in Korea-Japan multifactor CES productions and trades

ABSTRACT

In this paper, we examine the economic impact of information and communication technology (ICT) innovation, within a general equilibrium framework of empirically estimated constant-elasticity-of-substitution (CES) production frontiers. Such innovation generates not only productivity growth and price changes, but it also triggers changes in the economic structure of production and trade patterns. This process ostensibly increases the social welfare. To study the impact of ICT innovation, we construct a bilateral general-equilibrium model that spans 350 commodities and sectors of trade between Japan and the Republic of Korea. We estimate all CES parameters from published statistics, including linked input–output tables and Comtrade databases. A small exogenous productivity shock in the ICT is examined in terms of potential price reductions of all commodities in both countries.

KEYWORDS:

• CES production function
• linked input–output table
• information and communication technology
• Armington elasticities
• general equilibrium modelling

JEL CLASSIFICATION:

• D24
• D58
• F14
• O33
• O53

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ These terminologies of classification are adopted from Saito (2004) while Feenstra et al. (2014) use different terms.

² For two-period cases, the growth of the aggregate equals the Sato-Vartia Index (26). See Appendix for details.

³ Note that $\delta =1$ is the solution to (17) for both countries at current state equilibrium.

⁴ Since exchange rates play a significant role in the realignment of the trade flows, we may have to examine how exchange rates are affected by the trade flows (exports, in particular). However, given that Korea’s trades are basically denominated in dollars, we consider that the influence on won-yen exchange rate will be minimal and negligible. For that reason, constant exchange rate is assumed in the subsequent analyses.

Additional information

Funding

This work was supported by JSPS KAKENHI Grant Number 19K13683.