Growth rates and aggregate welfare : an international comparison

This paper explores the relationship between growth rates and changes in welfare, using alternative procedures for measuring growth. The Bank and other organizations often compute growth rates by fitting a least-squares linear trend line to the logarithmic values of economic indicators for a period. This paper questions the use of the least-squares procedure for measuring people's economic welfare over time. Instead, the author develops a conceptual framework for deriving an aggregate growth rate from a welfare function defined in terms of levels of per capita incomes in different years. Using this function, the author derives the welfare implications of alternative procedures for estimating growth. The new procedure captures all the desirable properties of a welfare function. In addition, the paper deals with the issue of aggregating growth rates over countries, citing two drawbacks to the use of country classifications developed for the World Development Report. First, the method depends on exchange rates with changes in welfare. Second, the World Development Report gives greater weight to the growth rates of richer countries (not necessarily the most populated ones), which is highly questionable for measuring welfare. Finally, the author proposes an alternative procedure for calculating aggregate growth rates, one that is more suitable for comparing different countries'welfare.