Economic Report President

is attributable to the strong economy, which in turn is due partly tostrong investment.)In addition to national saving, another source of funds for investmentis capital inflows from abroad. In the national income and productaccounts, domestic investment equals national saving (plus a statisticaldiscrepancy) less net foreign investment, which is the amountthat domestic residents are lending abroad less the amount that foreignersare lending to us. Net foreign investment has been significantlynegative on average during this decade (that is, foreigners have beeninvesting more capital in the U.S. economy than Americans have beeninvesting abroad), as it was during the 1980s, providing additionalresources for domestic investment. As with private domestic saving,however, the net capital inflow depends partly on the demand forinvestment funds, so it cannot be considered an independent cause ofstrong investment.Falling Computer PricesA fourth factor spurring investment during the past several yearshas been a remarkable drop in the price of computers. (Prices havealso fallen for some other capital goods, although less dramatically.)Continued technological advances pushed down the chain-weightedprice index for business computers and peripheral equipment byabout 30 percent at an annual rate during the first three quarters of1998, following declines of around 25 percent during both 1996 and1997. The combination of falling prices, new products, more innovativeapplications of existing technology, and concerns about the year2000 problem (discussed later in this chapter) has sharply boostedoutlays in this area. Between the end of 1995 and the third quarter of1998, nominal computer spending increased roughly 30 percent, andreal computer spending tripled. Nominal computer spending is nowroughly twice what it was at the end of the 1980s, and real computerspending is about 12 times as large. This exceptional advance in realcomputer spending has comprised a significant part of growth in realequipment investment.IMPLICATIONS OF THE INVESTMENT BOOMThe 1990s boom in business fixed investment has generated a significantincrease in the Nation’s stock of business capital. The largercapital stock has benefited the economy in two important ways: it hashelped restrain inflation by increasing industrial capacity, and it hashelped raise productivity.Capacity Utilization and InflationWhen demand for resources in the economy exceeds supply, inflationusually results. The simplest measure of the utilization of laborresources is the unemployment rate. Inflation often rises when labor73