Making Dynamic Welfare Comparisons
For guidance in determining which items should be included in comprehensive NDP and how they should be included, reference is often made to the linearized Hamiltonian from an optimal growth problem. The paper gives a rigorous interpretation of this procedure in terms of a money-metric utility function linked to familiar elements of standard welfare theory. A key insight is that the Hamiltonian itself is a quasilinear utility function, so imposing the money-metric normalization is simply equivalent to using Marshallian consumer surplus as the appropriate measure of welfare when there are no income effects. The twin concepts of the "sustainability-equivalence principle" and the "dynamic welfare-comparison principle" are explained, and it is indicated why these two principles are important for the theory of national income accounting.
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Web page: http://www.economics.harvard.edu/journals/hier
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