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Underestimating the Real Growth of GDP, Personal Income and Productivity

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  • Martin S. Feldstein

The problems involved in estimating real output that I discuss in this paper cause the official government statistics to underestimate of the rates of growth of real GDP, real personal income, and productivity. That underestimation is important not just to economists trying to understand where the economy is going but also to the broader public and to the political system. The understatement of real growth reflects the enormous difficulty of dealing with quality change and the even greater difficulty of measuring the value created by the introduction of new goods and services. Despite the vast amount of attention that has been devoted to this subject in the economic literature and by the government agencies, there remains insufficient understanding of just how imperfect the official estimates actually are. It is important for economists to recognize the limits of our knowledge and to adjust public statements and policies to what we can know. This paper is not about the recent slowdown in measured productivity but that subject is discussed briefly.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23306.

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Date of creation: Mar 2017
Publication status: published as Martin Feldstein, 2017. "Underestimating the Real Growth of GDP, Personal Income, and Productivity," Journal of Economic Perspectives, vol 31(2), pages 145-164.
Handle: RePEc:nbr:nberwo:23306
Note: DAE EFG
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  1. Christian Broda & David E. Weinstein, 2010. "Product Creation and Destruction: Evidence and Price Implications," American Economic Review, American Economic Association, vol. 100(3), pages 691-723, June.
  2. Michael J. Boskin, 2000. "Economic Measurement: Progress and Challenges," American Economic Review, American Economic Association, vol. 90(2), pages 247-252, May.
  3. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-194, April.
  4. Diane Coyle, 2015. "GDP: A Brief but Affectionate History (Revised and Expanded Edition)," Economics Books, Princeton University Press, edition 2, number 10598.
  5. Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
  6. Redding, Stephen J. & Weinstein, David E., 2016. "A unified approach to estimating demand and welfare," LSE Research Online Documents on Economics 67681, London School of Economics and Political Science, LSE Library.
  7. Robert William Fogel & Enid M. Fogel & Mark Guglielmo & Nathaniel Grotte, 2013. "Political Arithmetic: Simon Kuznets and the Empirical Tradition in Economics," NBER Books, National Bureau of Economic Research, Inc, number foge12-1, November.
  8. Chad Syverson, 2017. "Challenges to Mismeasurement Explanations for the US Productivity Slowdown," Journal of Economic Perspectives, American Economic Association, vol. 31(2), pages 165-186, Spring.
  9. J. Steven Landefeld & Eugene P. Seskin & Barbara M. Fraumeni, 2008. "Taking the Pulse of the Economy: Measuring GDP," Journal of Economic Perspectives, American Economic Association, vol. 22(2), pages 193-216, Spring.
  10. Kuznets, Simon, 1973. "Modern Economic Growth: Findings and Reflections," American Economic Review, American Economic Association, vol. 63(3), pages 247-258, June.
  11. Nordhaus, William D, 1997. "Traditional Productivity Estimates Are Asleep at the (Technological) Switch," Economic Journal, Royal Economic Society, vol. 107(444), pages 1548-1559, September.
  12. Baily, Martin & Gordon, Robert J, 1989. "Measurement Issues, the Productivity Slowdown and the Explosion of Computer Power," CEPR Discussion Papers 305, C.E.P.R. Discussion Papers.
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