The measurement of growth under embodied technical change

Abstract

The new US data from NIPA contradict some of the well-known Kaldor stylized facts, and call for a reformulation of the modern theory of economic growth. Among these new facts, three must be stressed: a permanente decline in the relative price of durable goods, a permanente increase in the real equipments to real GDP ratio, and a large long run growth rate of equipments relative to the growth rate of non durable consumption. In order to be consistent with these new facts, growth models must include at least two sectors, and the problem of defining aggregate output arises. In this paper, the economic theory of index numbers is used to propose a definition of the output growth rate, which is consistent with a representative agent's preferences in a growth model with embodied technical change. The main finding are that (i) NIPA's methodology measures growth in accordance with the economic theory on index numbers, and (ii) when the growth rate is measured as in NIPA, the contribution of embodied technical change to per capita GDP growth in the US is of 69% much larger than the 58% found by Greenwod, Hercowitz and Krusell (1997).