Download this Paper Open PDF in Browser

Paasche vs. Laspeyres: the Elasticity of Substitution and Bias in Measures of TFP Growth

11 Pages Posted: 18 Oct 1998 Last revised: 10 Oct 2010

Alwyn Young

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: July 1998

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.

Suggested Citation

Young, Alwyn, Paasche vs. Laspeyres: the Elasticity of Substitution and Bias in Measures of TFP Growth (July 1998). NBER Working Paper No. w6663. Available at SSRN: https://ssrn.com/abstract=122470

Alwyn Young (Contact Author)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1329 (Phone)
773-702-0458 (Fax)

Paper statistics

Downloads
27
Abstract Views
885