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Paasche vs. Laspeyres: The Elasticity of Substitution and Bias in Measures of TFP Growth

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  • Alwyn Young

Abstract

In recent papers, Nelson and Pack (1995) , Rodrik (1997), and Hsieh (1997a) argue that standard measures of total factor productivity growth in countries where the capital-labour ratio has risen rapidly, e.g. the East Asian NICS, will understate true productivity growth if the elasticity of substitution is less than one and there is labour augmenting technical change. This note shows that this argument increases a Paasche measure of productivity, at the expense of lowering a Laspeyres estimate. The conditions under which total factor productivity growth is consistently underestimated are clarified.

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  • Alwyn Young, 1998. "Paasche vs. Laspeyres: The Elasticity of Substitution and Bias in Measures of TFP Growth," NBER Working Papers 6663, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6663
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    1. Dani Rodrik & Tain-Jy Chen, 1998. "TFPG Controversies, Institutions and Economic Performance in East Asia," International Economic Association Series, in: Yujiro Hayami & Masahiko Aoki (ed.), The Institutional Foundations of East Asian Economic Development, chapter 4, pages 79-105, Palgrave Macmillan.
    2. Alwyn Young, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 641-680.
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    Cited by:

    1. Carlos Esteban Posada & Wilman Gómez, 2002. "Crecimiento económico y gasto público: un modelo para el caso colombiano," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 20(41-42), pages 5-86, June.
    2. Wachter, Till von, 2001. "Employment and productivity growth in service and manufacturing sectors in France, Germany and the US," Working Paper Series 0050, European Central Bank.
    3. Jonny Castro Tapias, 2014. "Crecimiento económico y capital humano: Un análisis de cointegración para Colombia en el periodo 1960 – 2012," Documentos de Trabajo 12418, Universidad Católica de Colombia.

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