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

By:

Young, Alwyn

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w6663.Publication details: Cambridge, Mass. National Bureau of Economic Research 1998.Description: 1 online resource: illustrations (black and white)Online resources:

Available additional physical forms:

Hardcopy version available to institutional subscribers

Abstract: 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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July 1998.

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.