Is the Output Growth Rate in NIPA a Welfare Measure?

• Authors: Omar Licandro.
• BSE Working Paper: 110828 | September 22
• Keywords: welfare , growth measurement , quantity indexes , NIPA , dynamic General Equilibrium , equivalent variation , Fisher-Shell index , divisia index , embodied technical change
• JEL codes: C43, D91, O41, O47
• welfare
• growth measurement
• quantity indexes
• NIPA
• dynamic General Equilibrium
• equivalent variation
• Fisher-Shell index
• divisia index
• embodied technical change

This paper shows that, for a general family of dynamic general equilibrium models, the rate of real output growth as measured by National Income and Product Accounts (NIPA) reflects changes in welfare in the precise sense of equivalent variation. The main argument is straightforward. In a two-sector dynamic general equilibrium model of heterogeneous households, recursive preferences, and quasiconcave technology, the Bellman equation provides a representation of household preferences over current consumption and investment. When applied to this representation of preferences, a Fisher-Shell true quantity index turns out to be equal to the Divisia index, closely approximated by the Fisher ideal chain index used in NIPA.