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Finance and Economics Discussion Series: 2006-44 Screen Reader version

Table 5
Year of Introduction for New Semiconductor Technology
Process (nanometers) Lithography frontier Intel MPU chips
10,000 1969 1971
8000 1972 Not available
6000 Not available 1974
5000 1974 Not available
4000 1976 Not available
3000 1979 19791
2000 1982 Not available
1500 1984 1982
1250 1986 Not available
1000 1988 1989
800 1990 1991
600 1993 1994
350 1995 1995
250 1997 1997
180 1999 1999
130 2001 2001
90 2003 2004
65 2005 2005

1Intel began making MPU chips with this process in 1979. We omitted Intel's earlier use of the 3000 nanometer process (starting in 1976) to produce less complex devices, such as scales. Return to Table

Source. VLSI Research Inc. (2006) for the introduction dates for frontier lithography processes. Intel's introduction date for the 65-nanometer process was obtained from its 2005 annual report; all other Intel introduction dates were obtained from Intel's website (

Figure 1.  Semiconductor Prices.  The upper panel plots annual data for an aggregate price index for semiconductors (y-axis) from 1975 to 2004 (x-axis).  The data are plotted on a log scale, indexed to equal one in 1987.  This panel shows declines in semiconductor prices over the full period.  A somewhat faster rate of decline is evident between the mid-1990s and about 2001 than in the periods from 1974 to 1995 and from about 2001 to 2004.  The lower panel plots quarterly data for prices of microprocessor units (MPUs) and dynamic random access memory (DRAM) chips (y-axis) over selected periods from the first quarter of 1975 to the fourth quarter 2004 (x-axis).  The data are plotted on a log scale, indexed to equal one in the first quarter of 1987.  The plot for DRAM extends from the first quarter of 1975 to the fourth quarter of 2004.  This plot shows declines in prices over the full sample period with a period of relatively slow decline from the late 1980s to the mid 1990s.  The plot for MPUs extends from the first quarter of 1987 to the fourth quarter of 2004.  This plot shows declines in prices over the full sample period with a period of relatively faster price declines from the mid-1990s to around 2001.

Figure 2.  Declines in Semiconductor and Computer Prices.  Chart plots percent changes from three years earlier (at an annual rate) in annual data for aggregate semiconductor prices and for computer prices (y-axis) from 1980 to 2004 (x-axis).  The computer price index is the NIPA chain-weighted price index for computers and peripheral equipment.  The chart highlights a correlation between the two series.  The chart indicates that both series fell at relatively steady rates from 1980 to 1994 with computer prices generally falling in a range from 10 to 15 percent a year and semiconductor prices generally falling somewhat faster.  Starting in the mid-1990s, both series started to fall faster, with computer prices falling about 20 percent a year and semiconductor prices falling about 50 percent a year. The fastest rates of decline in both plotted series occurred around 2000.  From that point forward, rates of decline were more gradual for both series.

Figure 3.  Price-Cost Markup.  Chart plots price-cost markups for Intel and Micron Technology (y-axis) from 1984 to 2004 (x-axis).  Markups are measured as the ratio of price to average operating cost (adjusted to account for the value of stock option grants) based on annual data from Compustat and company 10-K statements.  The markup for Intel rises from around 1 in the mid-1980s to about 1.5 in the second half of the 1990s; it then drops back to about 1 in 2001 before rising back up to about 1.4 in 2004.  The markup for Micron Technology is more variable, reaching lows of around 0.6 to 0.8 in 1986, 1998, and 2002; this markup reaches peaks in 1988, 1995, and 2000, with the highest peak of about 1.9 reached in 1995.

Figure 4.  Decomposition of Constant-Quality Semiconductor Price Changes. Figure 4, upper panel.  Decomposition of DRAM Prices.  Stacked bar chart shows a decomposition of average annual changes in DRAM prices, covering the periods 1990 to 1995, 1995 to 2001, and 2001 to 2004.  Price changes are decomposed into changes in the price-cost markup, cost per transistor, and other factors, displaying the numbers in table 3.  A line graph on the chart shows total price change in each period, plotting the numbers in the first line of table 3: a roughly 15 percent average annual decline from 1990 to 1995, a nearly 54 percent decline from 1995 to 2001, and an 11 percent decline from 2001 to 2004.  The figure indicates that the largest chunk of the swings in DRAM prices over these periods reflects swings in cost/transistor.  The second largest piece of the swings in DRAM prices reflects swings in the price/cost margin.  The 'other' component contributed little to the swings in DRAM prices. Figure 4, lower panel.  Decomposition of MPU Prices.  Stacked bar chart shows decomposition of average annual changes in MPU prices, covering the periods 1988 to 1994, 1994 to 2001, and 2001 to 2004.  Prices changes are decomposed into changes in the price-cost markup, cost per transistor, and other factors, displaying the numbers in table 4.  A line graph on the chart shows total price change in each period, plotting the numbers in table 4:  a 30 percent average annual decline from 1988 to 1994, a 63 percent decline from 1994 to 2001, and a nearly 41 percent decline from 2001 to 2004.  The bar for 'other' is tiny in the first period, but much larger in the second and third periods; the size of this bar changes relatively little between the second and third periods.  The bar for cost-transistor gets a little more negative in 1994 to 2001 and then gets less negative in 2001 to 2004.  The bar for the price-cost markup is small (close to zero) in both 1988 to 1994 and 1994 to 2001.  This bar becomes modestly positive during 2001 to 2004.  These patterns indicate that a swing in the 'other' term of the decomposition accounts for much of the deceleration in MPU prices from 1994 to 2001.  A pickup in the markup accounts for part of the swing to more modest rates of price decline during 2001 to 2004.

Figure 5.  Intel's Production Cost per Transistor for Frontier MPU Chips.  Chart plots annual data on Intel's cost per transistor for frontier MPU chips (y-axis) for every other year from 1995 to 2005 (x-axis).  The chart also plots a line falling at a constant rate of 34.7 percent, the average annual decline in the Intel cost per transistor series from 1995 to 2005.  Both series are plotted on a log scale, indexed to equal one in 1995.  The plotted lines indicate that the rate of decline in Intel's cost per transistor was very steady; that is, the actual data points lie very close to the plotted trend line.  The data for Intel are reproduced by permission of Intel Corporation, which retains the copyright.


* Aizcorbe is affiliated with the Bureau of Economic Analysis; Oliner and Sichel are affiliated with the Federal Reserve Board. Darrell Ashton, Blake Bailey, Ryan Bledsoe, and Tom McAndrew provided excellent research assistance. We thank Ernie Berndt, Iain Cockburn, Mark Doms, John Fernald, Kevin Fox, Dale Jorgenson, Glenn Rudebusch, Eric Swanson, and Dan Wilson for valuable comments on earlier versions of the paper. We also thank David Byrne and Charles Gilbert for providing data on semiconductor prices and shipments. Gene Amromin and Nellie Liang kindly provided estimates of the value of stock-option grants for Intel Corporation and Micron Technology Inc. We are indebted as well to Alan Allan and Mung Chen of Intel Corporation, Robert Doering of Texas Instruments Inc., and Dan Hutcheson of VLSI Research Inc. for sharing their expertise on semiconductor technology trends and to Mike Scherer for a helpful discussion on competition and innovation in the semiconductor industry. The views expressed are those of the authors alone and should not be attributed to the Bureau of Economic Analysis, the Board of Governors of the Federal Reserve System, or other members of the staff of these organizations. Return to Text
1. See, for example, Oliner and Sichel (2000a and 2002), Jorgenson and Stiroh (2000), and Jorgenson, Ho, and Stiroh (2002). Return to Text
2. Our analysis does not emphasize Moore's Law, an often-cited indicator that refers to the period over which the number of transistors doubles in leading-edge chips (Moore, 1965). We focus instead on a more fundamental driver of advances in semiconductor technology, the shrinkage in the size of the smallest component on a chip. This shrinkage is what enables manufacturers to pack more transistors on a chip at an acceptable cost of production. See Flamm (2004) for an interesting discussion of Moore's Law. Return to Text
3. For MPUs and DRAMs, the series used for the earlier periods are available for several years after 1992. We confirmed that these series moved in sync with the Federal Reserve series during the overlap period. Return to Text
4. From 1992 to 2004, DRAMs made up 10.6 percent of nominal shipments of integrated circuits from U.S. producers and accounted for about 6 percent of the decline in overall semiconductor prices. These figures and those cited above for MPUs were calculated by Federal Reserve staff based on source data from the Semiconductor Industry Association and the Census Bureau. Return to Text
5. Although the MPU price data are available back to 1987:Q1, the table shows the percent change over 1988-1994 to match the time period used for our price decomposition in section 4. Return to Text
6. See Hansen (2001) for an overview of the literature on tests for structural change. Return to Text
7. In principle, the supF_{T} test could have been used in the first stage to test for the existence of any breaks. However, BP (2006) indicate that, for power reasons, it is preferable to use the UDMAX test in the first stage. Return to Text
8. To assess the robustness of these tests, we considered variations in the sample periods, the minimum number of data points required for subsamples, and the lag length on the Newey-West covariance matrices. Although the test statistics were somewhat sensitive to these variations, the results remained significant at the levels reported in table 2. Return to Text
9. See, for instance, Standard & Poor's (2005). The annual reports of the major semiconductor producers also provide useful information about industry developments. Return to Text
10. Although using log differences would have simplified the arithmetic of the decomposition, we chose to use percent changes because log differences are a poor approximation for rates of change in rapidly-changing series, like semiconductor prices. Return to Text
11. Note that we calculate the markup over average cost rather than over marginal cost. Although standard models of firm behavior (Hall, 1988, for example) generate markups defined in terms of marginal cost, such cost data are difficult to obtain. Moreover, the optimization problem for semiconductor firms is complex, entailing decisions along several margins that range from the short-term choice of variable inputs given existing plants and technology to the long-horizon allocation of resources to research and development activities. There is no fully articulated model of the choices along the various margins, though Aizcorbe and Kortum (2005) is a step in this direction. In the absence of specific guidance from theory, we use the markup over average cost as a rough indicator of market conditions. As a check on these results, section 5 presents a cost series for Intel that is closer to short-run marginal cost and discusses the behavior of the markup implied by this series. Return to Text
12. In December 2004, the Financial Accounting Standards Board issued a new rule (Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment") that requires public companies to include the value of stock-option grants as a labor cost on their income statements for fiscal years that begin after June 15, 2005. Thus, starting in fiscal 2006, it will no longer be necessary to adjust reported income for the value of option grants. Return to Text
13. Between 1995 and 2001, Micron derived a substantial part of its total revenue from the production of personal computers. For these years, we strip out its PC subsidiary when calculating the profit margins and the markup. Return to Text
14. The data appendix provides additional detail on the definition and source for each series used in the decomposition. Return to Text
15. Our results support Flamm's (2004) conclusion that the move from three-year to two-year technology cycles, by itself, cannot fully explain the steep declines in DRAM prices in the second half of the 1990s. Return to Text
16. As for the improvement in quality beyond the number of transistors per chip, Chwelos shows that an MPU performance measure based on benchmark tests for laptops increased much more rapidly during 1994-98 than it did during 1990-94. Although Chwelos does not report analogous results for transistors per chip, our data (which cover a broader set of MPU chips than Chwelos' sample) show no acceleration in transistors per chip between 1990-94 and 1994-98. A change in purchasers' willingness to pay for functionality would appear in Chwelos' hedonic regression as a structural break in the coefficients on performance characteristics. Chwelos does not formally test for such breaks, but the reported standard errors suggest that the coefficient on the benchmark performance measure was significantly higher in 1997-98 than in earlier years.

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17. To be clear, we are not criticizing the use of changes in relative prices to infer trends in multifactor productivity via the "dual" approach to production analysis. Rather, we are arguing that multifactor productivity in the semiconductor industry is not a reliable gauge of technological progress over periods during which margins vary or during which other factors largely unrelated to technology induce price swings. Return to Text
18. Prior to the 2005 edition, the Roadmap also characterized the minimal feature size associated with each technology cycle. This size measure was known as the "technology node." Because DRAMs historically were the pace-setting chip for scale reduction, technology nodes referred to the minimal width for circuitry in these chips. The 2005 Roadmap, however, stopped using the DRAM-based technology node as a general summary measure of minimal feature size because advances specific to MPU and flash memory chips have been driving the scale reductions for those chips in recent years. The Roadmap now refers to separate scaling benchmarks for DRAM, MPU, and flash memory chips. In addition, the Roadmap's projections for the length of technology cycles now allow for differences across the three chip types. Return to Text
19. The length of a technology cycle, as defined in the Roadmap, is distinct from Moore's Law, which refers to the historical tendency for the number of transistors on leading-edge chips to double roughly every eighteen months. The Roadmap (2005, page i) notes that this rate of increase in transistors per chip, combined with a three-year technology cycle for shrinking feature width, resulted in a continuous increase in chip size; by the mid-1990s, the larger chips had begun to substantially boost production costs. The shift to a two-year technology cycle allowed Moore's Law to remain on track while relieving the pressure on the chipmakers' cost structure. Return to Text
20. We thank Dan Hutcheson of VLSI Research Inc. for providing these data. Return to Text
21. For the 1500 nanometer process introduced in the early 1980s, our data indicate that Intel sold chips based on this technology two years before the process was used anywhere in the industry. Although we were unable to resolve this inconsistency, it has no effect on the average length of technology cycles over the periods that we examine. Those results depend only on the beginning-of-period and end-of-period values for the MPU and lithography series and not on the values for intermediate years. Return to Text
22. These data are reproduced by permission of Intel Corporation, which retains the copyright. We are grateful to Mung Chen of Intel for providing the data. Return to Text

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