GDP, Technical Change, and the Measurement of Net Income: the Weitzman Model Revisited
We show how technical change, measured as a shift in the GDP function, is combined with net income to track welfare change. This provides a bridge between the productivity literature and the welfare-related literature that tends to reason in terms of net product functions: although the relevant income measure is net of depreciation, productivity is measured based on gross output. We show that net product, net income, net expenditure and productivity change are complements, not substitutes. We also examine whether holding gains and losses should be part of depreciation and conclude that in a general equilibrium setting, either productivity change or holding gains should be part of an extended Weitzman-type net income measure, but not both.
The authors would like to thank Erwin Diewert, Dale Jorgenson and Martin Weitzman for helpful comments. All errors remain of course our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.