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

  • Alwyn Young
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    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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    File URL: http://www.nber.org/papers/w6663.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6663.

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    Date of creation: Jul 1998
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    Handle: RePEc:nbr:nberwo:6663
    Note: EFG
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    1. Rodrik, Dani, 1997. "TFPG Controversies, Institutions, and Economic Performance in East Asia," CEPR Discussion Papers 1587, C.E.P.R. Discussion Papers.
    2. 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.
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