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Northern America’s Production of Technology Capital Is Transforming the World Economy

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  • Edward C. Prescott

    (Arizona State University)

Abstract

Technology capital produced by multinationals, many of which are American, is playing a major role in transforming the world economy. This form of capital is special because it can be used in multiple locations not only within a country but also in locations in other countries by their wholly owned foreign subsidiaries. The extension of aggregate economic theory to include this form of capital justifies Adam Smith that the extent of specialization is limited by the size of the market. Further, the invisible hand works, and there are no monopoly rents. The extended theory accounts for an important part of the large gains from being open to foreign direct investment (FDI). It accounts for much of the higher reported returns on U.S. FDI than on foreigners’ FDI in the U.S.

Suggested Citation

  • Edward C. Prescott, 2016. "Northern America’s Production of Technology Capital Is Transforming the World Economy," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 51(3), pages 127-132, July.
    • Handle: RePEc:pal:buseco:v:51:y:2016:i:3:d:10.1057_s11369-016-0011-3
    DOI: 10.1057/s11369-016-0011-3
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    References listed on IDEAS

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    1. Adam Blandin & John H. Boyd & Edward C. Prescott, 2016. "Equilibrium with mutual organizations in adverse selection economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 3-13, June.
    2. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
    3. McGrattan, Ellen R. & Prescott, Edward C., 2009. "Openness, technology capital, and development," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2454-2476, November.
    4. Robert M. Solow, 1956. "A Contribution to the Theory of Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(1), pages 65-94.
    5. Thomas J. Holmes & Ellen R. McGrattan & Edward C. Prescott, 2015. "Quid Pro Quo: Technology Capital Transfers for Market Access in China," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(3), pages 1154-1193.
    6. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
    7. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
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