An overview of issues in measuring the performance of national economies

This chapter reviews the ways that economists measure the aggregate economic performance of national economies. Efficiency and productivity analysis using the methodologies of data envelopment analysis and stochastic frontier analysis has made a significant contribution to this challenge after the initial research, which arose in the context of the analysis of economic growth. That initial research led to the idea of measuring total factor productivity change, TFPC, and its identification with an unobserved data residual representing technological progress. The contribution of efficiency and productivity analysis has been to expand our understanding of what TFPC could consist of and what could drive it and how we can expand our understanding of it beyond the idea of an unexplained data residual. Amongst the critical questions in this search is the exact definition of what measure of economic performance economists should use. The conventional answer is to measure economic performance by real gross domestic product, GDP, i.e. the gross value-added measure of GDP. However, it has been frequently suggested that a broader measure of economic welfare should be used, and research in this area is particularly lively now in the early part of the twenty-first century. We interpret the concept of the relative performance of national economies very widely and devote attention to examining a wide range of different concepts of economic performance including but certainly not limited to the value-added definition of GDP.