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.
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Delivered as the Adam Smith lecture at NABE’s Annual Meeting on October 11, 2015.
*Edward C. Prescott is Professor of Economics at Arizona State University and is the W. P. Carey Chair in Economics in the W. P. Carey School of Business. He has previously held faculty positions at the University of Pennsylvania, Carnegie Mellon University, the University of Minnesota, and The University of Chicago. He is a Senior Monetary Analyst at the Minneapolis Federal Reserve Bank. He received his B.A. in Mathematics from Swarthmore College in 1962, his M.S. in Operations Research from Case-Reserve University in 1963, and his Ph.D. in Economics from Carnegie Mellon University in 1967. He is an aggregate economist theorist who develops and applies dynamic economic theory to problems in financial economics, economic fluctuations, public finance, growth and development, and international economics areas. He and Finn Kydland were jointly awarded the 2004 Nobel Prize in Economics “for their contributions to dynamic macroeconomics: the time inconsistency of economic policy and the driving forces behind business cycles.”
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Prescott, E.C. Northern America’s Production of Technology Capital Is Transforming the World Economy. Bus Econ 51, 127–132 (2016). https://doi.org/10.1057/s11369-016-0011-3
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DOI: https://doi.org/10.1057/s11369-016-0011-3