Index Numbers and Productivity Measurement

The chapter provides an overview of the index number methods and approaches for measuring changes in output and input quantities as well as measuring changes in output and input prices. The problem of generalization to the case of multiple outputs and inputs is discussed. Two major alternative approaches to this problem form the core of this chapter. The first approach uses a framework where aggregates of output and input quantities are first computed and the resulting aggregates are used to measure changes in output and input quantities. Issues relating to the choice of functional form for the aggregates are discussed. The second approach is the standard index number approach where index number formulae are used to directly measure changes in output and input quantities without having to first measure quantity aggregates. Index number formulae used in direct and indirect measurement of quantity change are discussed. The axiomatic and economic theoretic approaches to index numbers along with their implications for the choice of an appropriate index number formula are described. The problem of multilateral comparisons, the transitivity requirement, implications of transitivity for the choice of appropriate formulae along with a few recommendations to the practitioner are presented in the last section.