Accounting for Growth in the Age of the Internet the Importance of Output-Saving Technical Change

Abstract

We extend the conventional Solow growth accounting model to allow innovation to affect consumer welfare directly. Our model is based on Lancaster’s New Approach to Consumer Theory, in which there is a separate “consumption technology� that transforms the produced goods, measured at production cost, into utility. This technology can shift over time, allowing consumers to make more efficient use of each dollar of income. This is “output-saving� technical change, in contrast to the Solow TFP “resource-saving� technical change. One implication of our model is that living standards can rise at a greater rate than real GDP growth.

Keywords: consumers, accounting, consumer welfare, GDP

JEL Classification: E01, O3, O4