Productivity Versus Welfare: Or GDP Versus Weitzman's Ndp

Abstract

While GDP is the appropriate measure of output, I argue that Weitzman's NDP (WNDP) - nominal net domestic product deflated by the price of consumption - is the appropriate measure of welfare. Total factor productivity (TFP) growth measures the shift in the GDP frontier, and there is an analogous concept for WNDP, which I call total factor welfare (TFW) growth. I calculate and compare WNDP and GDP, and TFP and TFW, for the United States in the 1990s. I find that the acceleration of WNDP post 1995 was as great as that of GDP, even though the aggregate depreciation rate was rising.