Is the GDP Growth Rate in NIPA a Welfare Measure?

• Authors: Omar Licandro.
• BSE Working Paper: 110150 | September 15
• Keywords: embodied technical progress , growth measurement , quantity indexes , NIPA
• JEL codes: C43, D91, O41, O47
• embodied technical progress
• growth measurement
• quantity indexes
• NIPA

The permanent decline of equipment prices relative to nondurable consumption prices rendered fixed-base quantity indexes obsolete, because of the well-known substitution bias. National Income and Product Accounts (NIPA) responded by switching to a flexible-base quantity index to measure GDP growth. We argue this is a welfare measure of output growth. In a two-sector endogenous growth model, we use the Bellman equation to explicitly represent preferences on consumption and investment, we apply a Fisher-Shell true quantity index to this utility representation and show it is equal to the Divisia index, well approximated by the flexible-base quantity index used by NIPA.