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Accounting for variety

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  • Winkler, Julian

Abstract

I introduce a general method to account for the distribution of underlying components (variety) of an aggregate quantity, using the notion of entropy. This accounting decomposition enables a number of insightful applications for index numbers in economics. The cross-entropy of GDP with respect to a benchmark captures the change in its distribution, and thus how well this benchmark matches data for price and volume indices across time. This 'error' changes demonstrably over time. Accounting of variety also lends itself to an decomposition of labour productivity growth by a technology component (how many more `average' goods are produced per unit of labor?), an allocation component (does the distribution of labor inputs converge to the distribution of outputs?), and cost disease (does the distribution of expenditures diverge from the distribution of outputs?).

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  • Winkler, Julian, 2022. "Accounting for variety," MPRA Paper 113174, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:113174
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    References listed on IDEAS

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    1. Philippe Aghion & Antonin Bergeaud & Timo Boppart & Peter J. Klenow & Huiyu Li, 2019. "Missing Growth from Creative Destruction," American Economic Review, American Economic Association, vol. 109(8), pages 2795-2822, August.
    2. David Baqaee & Ariel Burstein, 2021. "Welfare and Output with Income Effects and Taste Shocks," NBER Working Papers 28754, National Bureau of Economic Research, Inc.
    3. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
    4. Jianmin Tang & Weimin Wang, 2004. "Sources of aggregate labour productivity growth in Canada and the United States," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 421-444, May.
    5. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-228, May.
    6. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
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    More about this item

    Keywords

    National accounting; beyond GDP; entropy; misallocation;
    All these keywords.

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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