Chapter 66 The Measurement of Productivity for Nations

This chapter covers the theory and methods for productivity measurement for nations. Labor, multifactor and total factor productivity measures are defined and are related to each other and to gross domestic product (GDP) per capita. Their growth over time and relative counterparts are defined as well. Different conceptual meanings have been proposed for a total factor productivity growth (TFPG) index. These are easiest to understand for the case in which the index number problem is absent: a production process that involves one input and one output (a 1–1 process). It is easily seen that four common concepts of TFPG all lead to the same result in the 1–1 case. Moving on to a general N input, M output production scenario, we demonstrate that a Paasche, Laspeyres or Fisher index number formula provides a measure for all four of the concepts of TFPG introduced for the 1–1 case. This is an advantage of the Paasche–Laspeyres–Fisher family of formulas. When multiple inputs or outputs are involved, there is the problem of choosing among alternative functional forms. The axiomatic and economic approaches to index formula choice are reviewed. In addition, we briefly cover the Divisia index number approach and growth accounting, including the KLEMS (capital, labor, energy, materials and services) approach. The gross output measures of the KLEMS approach are contrasted with value added output measures such as GDP. Also, an alternative family of revenue function based productivity growth indexes proposed by Diewert, Kohli and Morrison (DKM) is outlined. The DKM approach facilitates the decomposition of productivity growth into economically meaningful components. This approach is useful, for example, for examining the effects of changes in the terms of trade on productivity growth.