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Productivity versus welfare: or, GDP versus Weitzman's NDP

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  • Nicholas Oulton

Abstract

How should productivity and welfare be measured when the composition of the capital stock is shifting towards assets with shorter lives? What sort of adjustment, if any, should be made for depreciation? While GDP is still appropriate as a measure of output, in this paper it is argued that NDP (WNDP)-nominal net domestic product deflated by the price index for consumption-is the appropriate measure of welfare. The rate at which the WNDP frontier is shifting out over time is analogous to the rate of growth of aggregate total factor productivity (TFP). Like the latter, it may be decomposed into the contributions made by TFP growth in individual industries, though with a different pattern of weights. The argument is illustrated by the experience of the United States in the 1990s. Here net investment increased more rapidly than gross investment and both grew faster than GDP, while the aggregate depreciation rate rose. Nevertheless the aggregate capital stock grew more slowly than GDP, and depreciation as a proportion of GDP was flat. Both official NDP and WNDP have been growing a little more slowly than GDP. But the acceleration of WNDP post 1995 was as great as that of GDP. Also, the rise in the growth rate of the WNDP frontier was equal to that of aggregate TFP.

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Paper provided by Bank of England in its series Bank of England working papers with number 163.

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Date of creation: Aug 2002
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Handle: RePEc:boe:boeewp:163

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  1. Michael R. Pakko, 2002. "What Happens When the Technology Growth Trend Changes?: Transition Dynamics, Capital Growth and the 'New Economy'," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 376-407, April.
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  7. Sefton, J. A. & Weale, M. R., 1996. "The net national product and exhaustible resources: The effects of foreign trade," Journal of Public Economics, Elsevier, vol. 61(1), pages 21-47, July.
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  9. M. L. Weitzman, 1974. "On the Welfare Significance of National Product in Dynamic Economy," Working papers 125, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Martin N. Baily & Robert Lawrence, 2001. "Do We Have A New E-Conomy?," NBER Working Papers 8243, National Bureau of Economic Research, Inc.
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  13. Dale W. Jorgenson & Kevin J. Stiroh, 2000. "Raising the Speed Limit: U.S. Economic Growth in the Information Age," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 125-236.
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Cited by:
  1. Nicholas Oulton, 2004. "A statistical framework for the analysis of productivity and sustainable development," LSE Research Online Documents on Economics 19963, London School of Economics and Political Science, LSE Library.
  2. Nicholas Oulton, 2004. "Investment-specific technological change and growth accounting," Bank of England working papers 213, Bank of England.
  3. Nicholas Oulton & Sylaja Srinivasan, 2003. "Capital stocks, capital services, and depreciation: an integrated framework," Bank of England working papers 192, Bank of England.
  4. Voxi Heinrich S. Amavilah, 2005. "The National Wealth of Selected Countries - A Descriptive Essay," Development and Comp Systems 0508007, EconWPA.
  5. Jorge Durán & Omar Licandro & Luis A. Puch, 2006. "Sobre la medición del crecimiento económico en presencia de progreso técnico incorporado," Working Papers 2006-24, FEDEA.

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