DP11594 Is the output growth rate in NIPA a welfare measure?

Author(s): Omar Licandro
Publication Date: November 2016
Keyword(s): Embodied technical change, Fisher-Shell index, Growth measurement, NIPA, Quantity indexes
JEL(s): C43, D91, O41, O47
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11594

National Income and Product Accounts (NIPA) measure real output growth by means of a Fisher ideal chain index. Bridging modern macroeconomics and the economic theory of index numbers, this paper shows that output growth as measured by NIPA is welfare based. In a dynamic general equilibrium model with general recursive preferences and technology, welfare depends on present and future consumption. Indeed, the associated Bellman equation provides a representation of preferences in the domain of current consumption and current investment. Applying standard index number theory to this representation of preferences shows that the Fisher-Shell true quantity index is equal to the Divisia index, in turn well approximated by the Fisher ideal index used in NIPA.