Which provides a better estimate of the "true" state of the U.S. economy, gross domestic product (GDP) or gross domestic income (GDI)? Past work has assumed the idiosyncratic variation in each estimate is pure noise, taking greater variability to imply lower reliability. We develop models that relax this assumption, allowing the idiosyncratic variation in the estimates to be partly or pure news; then greater variability may imply higher information content and greater reliability. Based on evidence from revisions, we reject the pure noise assumption for GDI growth, and our results favor placing a higher weight on GDI due to its relatively large idiosyncratic variability. This calls into question the suitability of the pure noise assumption in other contexts, including dynamic factor models.
The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income.-Simon Kuznets (1934, 7) Measured GDP growth is not the only contributor to the quality of life that Americans seek to enjoy.-"Economic Report of the President" (2012) Dennis Fixler is chief statistician of the Bureau of Economic Analysis. David S. Johnson is chief economist of the BEA. Research conducted while David S. Johnson was a visiting scholar at the Russell Sage Foundation and as staff at the US Census Bureau. The authors would like to thank Ed Wolff, Chris Carroll, Steve Landefeld, and participants in the NBER Conference on Research in Income and Wealth "Measuring Economic Stability and Progress" conference. The views expressed in this chapter, including those related to statistical, methodological, technical, or operational issues, are solely those of the authors and do not necessarily refl ect the official positions or policies of the Census Bureau or the Bureau of Economic Analysis, or the views of other staff members. The authors accept responsibility for all errors. This chapter is released to inform interested parties of ongoing research and to encourage discussion of work in progress. For acknowledgments, sources of research support, and disclosure of the authors' material fi nancial relationships, if any, please see http://www.nber.org/chapters/c12828.ack. 1. See http://www.grossnationalhappiness.com for a description of the gross national happiness index developed by the Center for Bhutan studies.
One of the persistent problems plaguing the measurement of productivity and output is accounting for changes in product quality. A similar problem arises in attempting to explain shifts in a production function using information on changes in the characteristics of the production process itself. We consider these problems under a behavioral model in which the firm chooses a profit-maximizing bundle of input/output/process characteristics as well as the profit maximizing levels of input and output. This view of quality change is similar to the endogenou.s design index advocated by Triplett [1983] for industrial prices and the endogenous quality indexes analyzed by Pollak [1983] for consumer prices. We show how a price-characteristics locus can be used to adjust the Tornqvist output-and input-oriented multifactor productivity indexes of Caves, Christensen and Diewert [1982] for changes in input, output and process characteristics. To show the applicability of the methodology to services, we apply the results in the framework of the commercial banking measurement of Fixler [1988] to measure the impact of bank branching on multifactor productivity.
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