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Why Investment in Information Technology Is Economically Necessary

Essay by   •  March 12, 2011  •  Essay  •  1,541 Words (7 Pages)  •  912 Views

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Increased investment in information technology has brought about more widespread use of computers and the internet. They are now cheaper, more powerful and more mobile. Computers have increased the dissemination of information and decreased production costs for many firms. There is now a necessity for business, educational institution and home ownership. However, we must face the problem of the ever-widening "digital divide." There seems to be a tendency for low-income families and minorities to lack computer access. The first step is to encourage ownership. We can achieve this by providing incentives for companies to expand their markets to these unprovided for groups. Increase access will benefit the country by lowering unemployment, increasing wages and increasing the standard of living.

First of all, IT has increased productivity. This means that for every unit of labor, usually measured by hour, more is being produced. At the same prices of production, more is being produced. This makes businesses more profitable. Increased productivity has created economic growth (Increased growth rate of GDP?). Shown in the Phillips Curve, imcrease productivity will make inflation and unemployment decrease at all possible (outcomes), shifting the curve in. (It increases real GDP? What's real GDP?). This allows for lower unemployment as well as lower inflation when there is usually a trade off. Our main goal* should be to enact policies* that create* economic growth, which will lower unemployment, or increase the number of jobs, and keep inflation stable. Obviously, IT has been beneficial for our nation and the world. We need American citizens to be aware of the benefits, or else providing them with the physical instruments will achieve little.

We can also represent our growth with the the Production Possibilites Frontier. The PPF is a model showing all possible combinations of output that can be produced with the technology of that time if all resources are efficiently used. Economic growth is demonstrated through an entire shift of this model up and to the right. Encouraging investment in IT and ownership of computers will generate economic growth, increasing GDP and shifting our PPF up and to the right. So long as the rate of economic growth exceeds the rate of population increase, we will also see an increase in the standard of living. The standard of living is qualitative, but we quantify it with real Gross Domestic Product (GDP) per capita. The greater the GDP per capita, the greater the standards of living. One of the government's roles is to maintain and help raise the quality of life of its people. IT is one way to help do that.

If investment increases, GDP increases. This means that there is more needed to be produced and more of a demand for workers. The amount by which GDP increases is much larger than the amount that investment increases. Investment is only one component of GDP, but it also affects consumption C and net exports (NX). Increase GDP is the same as an increase in income, so everyone consumes more. Increased consumption generates increased income for some workers, so they in turn consume more. There are rounds and rounds of this process. Economic growth means a lot.

The market for computers is monopolistically competitive. There are lots of firms in the industry with heterogeneous products, product differentiation, and there are few barriers to entry. Increase in demand over the past few years has meant abnormal profits for firms in the short run. Profitable industries attract firms so the number of firms has increased. If there are incentives to investment in IT, the less it will cost for a firm to enter the industry. The number of firms will increase, supply will increase and prices will go down [consider the MR, ATC, etc. curve. This seems too easy of a logic.] Increased competition has driven down the price of computers. The (low-end) computer industry is becoming more perfectly competitive, which results in a greater consumer surplus and??. More and more families can afford them, but there are still many who cannot.

Because of IT investment and a greater awareness* in the [necessity/cruciality] of computers, there has been an increase of students majoring in the computer field. If there is an increase supply in computer-related jobs without an increase in demand of firms for computer-related laborers, wages will decrease. Workers have less bargaining power, less (something) to ask for higher wages. If we invest in IT we will increase the amount of jobs for the increase of entrants into the IT job market and their wages will rise. In addition, firms have been replacing unskilled workers with machines using computer technology. Firms are instead demanding highly skilled workers such as computer technicians and engineers for design, operation and maintenance. The new technology leads to an increase in the demand for skilled workers, who are needed to design and operate the new machines. These skilled workers will earn higher wages. If demand grows and supply does not, there could eventually be structural unemployment for many.

However, there are also costs born from economic growth. Computers create externalities, effects on outside parties. There is no market mechanism that forces producers to consider the external costs and benefits. With accordance of the Coase Theorem, when externalities are present and action needs to be taken, there needs to be a small group involved, lost costs to bargaining and the rights of both parties need to be clearly defined. Otherwise the government has to step in and regulate. Government tax in proportion to the damages caused will help to minimize external effects. This tax should be equal to the difference between the marginal social cost

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