Paasche vs. Laspeyres: The Elasticity of Substitution and Bias in Measures of TFP Growth
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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- Young, Alwyn, 1995. "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 641-80, August.
- Dani Rodrik, 1997.
"TFPG Controversies, Institutions, and Economic Performance in East Asia,"
NBER Working Papers
5914, National Bureau of Economic Research, Inc.
- Rodrik, Dani, 1997. "TFPG Controversies, Institutions, and Economic Performance in East Asia," CEPR Discussion Papers 1587, C.E.P.R. Discussion Papers.
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