Paasche vs. Laspeyres: the Elasticity of Substitution and Bias in Measures of TFP Growth
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w6663
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.
Number of Pages in PDF File: 11
Date posted: October 18, 1998
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