Technological progress and endogenous capital depreciation: evidence from the U.S. and Japan

Japanese government planners use the average age of the manufacturing capital stock as one measure of their country's international "competitiveness." Compared to the U.S., the data show that Japanese depreciation rates are higher and that capital stocks are younger. ; In much of economic analysis, higher rates of depreciation are assumed to result in poorer economic performance. A high depreciation rate lowers the net capital stock, and decreases the level of output. ; In this paper, we argue that Japan's high depreciation rate is caused by that country's high rate of technological progress. Hiqh depreciation rates may be a symptom of a rapidly growing economy. ; Our results have implications for the international comparison of investment rates. Many economists have compared U.S. and Japanese investment rates net of the depreciation of capital. Presumably, economists are interested in investment rates because of the belief that high rates are positively correlated with a high level of economic performance. ; If technological progress causes depreciation rates to be high, however, net investment rates may not be informative about a nation's welfare. Two countries with the same net investment rate can have different rates of per capita output growth if their rates of technological progress are different. We show that the investment rate gross of depreciation may be a better indicator of welfare.