Over the past three decades, the prices of machinery and equipment have fallen sharply relative to overall prices. Rising trade and sweeping technological improvements have led to more efficient production of capital goods. This has helped countries around the world raise real investment and improve living standards.
However, trade tensions and sluggish productivity growth could slow the decline in the relative price of machinery and equipment, which would hold back investment growth worldwide.
Our chart of the week from the April World Economic Outlook shows that since 1990, the price of machinery and equipment relative to the price of consumption fell about 40 percent in emerging market and developing economies.
In advanced economies, the price drop was even higher—around 60 percent. These were dramatic declines when compared with the prices of other types of capital assets, such as housing and commercial structures, which more closely tracked the price level of consumption.
According to the IMF’s research, international trade has been the biggest factor behind falling prices of machinery and equipment relative to the price of consumption. And the decline in the price of capital goods, in turn, provided a sizable boost to real investment.
The IMF’s analysis reveals that, for the average emerging market and developing economy, about one-third of the increase in the real investment rate in machinery and equipment in the past three decades can be attributed to the cheapening of capital goods relative to consumption. Stronger macroeconomic policies and other factors contribute the rest.
For all economies, avoiding protectionist measures and reviving trade liberalization would help maintain the pace of decline in the relative price of capital goods. This would also provide a boost to the lackluster investment growth in advanced economies and support the capital deepening still very much needed in developing countries. Promoting innovation in the capital goods producing sector in both advanced and emerging market and developing economies is also crucial.