Productivity versus welfare: or, GDP versus Weitzman's NDP

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 06 September 2002

Working Paper no. 163
By Nicholas Oulton

How should productivity and welfare be measured when the composition of the capital stock is shifting towards assets with shorter lives? What sort of adjustment, if any, should be made for depreciation? While GDP is still appropriate as a measure of output, I argue that Weitzman’s NDP (WNDP) — nominal net domestic product deflated by the price index for consumption — is the appropriate measure of welfare. The rate at which the WNDP frontier is shifting out over time is analogous to the rate of growth of aggregate total factor productivity (TFP). Like the latter, it can be decomposed into the contributions made by TFP growth in individual industries, though with a different pattern of weights. The argument is illustrated by the experience of the United States in the 1990s. Here net investment increased more rapidly than gross investment and both grew faster than GDP, while the aggregate depreciation rate rose. Nevertheless the aggregate capital stock grew more slowly than GDP, and depreciation as a proportion of GDP was flat. Both official NDP and WNDP have been growing a little more slowly than GDP. But the acceleration of WNDP post 1995 was as great as that of GDP. Also, the rise in the growth rate of the WNDP frontier was equal to that of aggregate TFP.

PDFProductivity versus welfare: or, GDP versus Weitzman’s NDP

Other papers

Give your feedback

Was this page useful?
Yes
No
Add your details...