Modeling Aggregate Productivity Growth: The Importance Of Intersectoral Transfer Prices And International Trade

The value‐added model underlies current measures of aggregate productivity growth. Unbiased estimates result only if the economy is closed to trade in foreign‐produced material inputs and all domestic intersectoral transactions are characterized by marginal cost pricing. Neither condition typically holds. This paper identifies these biases and proposes a delivery‐to‐final‐demand framework, a modified form of that first introduced by Domar. The rate of aggregate productivity growth is decomposed into terms identifying the contributions of total factor productivity growth within individual sectors, the reallocation of the economy's primary inputs among sectors, and changes in the allocative efficiency of markets for intermediate goods. The adjustments necessary to remove biases from existing value‐added estimates are derived.