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This paper lays out the basic theory behind productivity measurement, whether at the level of the country, region, industry or firm. The theory is illustrated using recent data from UK official publications. Productivity growth over time and differences in productivity levels between countries or regions at a point in time are both covered. Labour productivity and multi-factor productivity (MFP) are discussed. In the case of MFP special attention is paid to the measurement of capital inputs. Wherever possible, an accompanying spreadsheet supplies data from recent publications by the United Kingdom’s Office for National Statistics so that readers can reproduce official estimates or even employ alternative assumptions to produce their own estimates. Limitations in the underlying theory are highlighted as are empirical difficulties in implementing the theory.

What effect, if any, do changes in the terms of trade have on the level of output (GDP) or welfare? I examine this issue through two versions of a textbook, Hecksher-Ohlin-Samuelson (HOS), two-good model of a small, open economy. In the first version both goods are for final consumption. In the second, one good is an imported intermediate input into the other. In both versions, economic theory suggests that an improvement in the terms of trade raises welfare (consumption) but leaves aggregate output (GDP) unchanged. This follows from a continuous-time analysis using Divisia index numbers. I then show that a national income accountant applying the principles of the 2008 System of National Accounts (SNA) would reach the same conclusions.

Real GDP measured from the output side, GDP(O), should equal real GDP measured from the expenditure side, GDP(E), just as corresponding two approaches to measuring GDP in current prices are necessarily equal. But this is only the case even in theory if real value added in each industry is measured by double deflation. We set out the theory of double deflation using a matrix algebra treatment based on the framework of the Supply and Use Tables. The context is the UK’s national accounts which measures volume growth by chained Laspeyres indices and which currently use single not double deflation. Initially we use simplified assumptions about prices. Later we introduce more realistic assumptions. We analyse the conditions on prices under which real GDP(O) equals real GDP(E). We consider three alternative methods of implementing double deflation. The preferred method makes use of all the price indices which the Office for National Statistics currently collects: Producer Price Indices, Services Producer Price Indices, Consumer Price Indices, Export Price Indices and Import Price Indices. We implement a simplified version of double deflation, using the same data as in the latest vintage of the national accounts, and compare our estimates with the official ones. In this version the same price index is used for each product regardless of whether the product is an output or an input. We find that double-deflated industry growth rates are consistently lower than the official single-deflated ones and also considerably more variable year-to-year. We interpret this finding as reinforcing the case for careful selection of the set of deflators to use for double deflation.

I propose a new explanation for the UK productivity puzzle. I graft the Lewis (1954) model onto a standard Solow growth model. What I call the neo-Lewis model is identical to the Solow model in good times. But in bad times foreign demand for a country’s exports is constrained below potential supply. This makes labour productivity growth depend negatively on the growth of labour input. I also argue that the neo-Lewis model can explain the fall in TFP growth, in the UK and elsewhere, after 2007. The predictions of the neoLewis model are tested on data for 23 advanced countries and also on a larger sample of 52 countries and find support.

China became the world’s largest economy in 2014”. “UK GDP grew by 0.2% in the first quarter of 2017”. “In the eurozone, inflation as measured by the Consumer Price Index was 1.4% in the year to May 2017”. Any scanner of websites that cover business news can read statements like these on any day of the week. Each statement relies on modern economic statistics whose basis is the System of National Accounts (SNA). In this chapter I briefly outline how the SNA came to have such a powerful (if background) role. I then go on to discuss some of the many criticisms levelled at the SNA, and in particular at GDP, its centrepiece. These criticisms fall into two groups. The first group raises doubts about how accurately GDP is measured. The second is more about the re levance of GDP (and the SNA) as a guide to policy. Even if GDP is measured accurately, is it measuring anything which thoughtful people should be interested in?

We examine the hypothesis that capacity can be permanently damaged by financial, particularly banking, crises. A model which allows a financial crisis to have both a short-run effect on the growth rate of labor productivity and a long-run effect on its level is estimated on 61 countries over 1954–2010. A banking crisis as defined by Reinhart and Rogoff reduces the long-run level of GDP per worker, and also that of capital per worker, by on average 1.1 percent, for each year that the crisis lasts; it also reduces the TFP level by 0.8%. The long run, negative effect on the level of GDP per capita, 1.8 percent, is substantially larger. So there is also a hit to employment. The effects on labor productivity, capital and TFP are larger in developing than in developed countries; the opposite is the case for employment.

I analyse TFP growth at the sectoral and aggregate level, using data for 10 industry groups covering the market sector for 18 countries over the period 1970-2007 drawn from the EU KLEMS dataset. TFP growth displays persistence at the aggregate level but not at the industry level, suggesting industry outputs are measured with error. In all countries resources have been shifting away from industries with high TFP growth towards industries with low TFP growth. Nevertheless I find that structural change (as measured by changes in value added shares) has favoured growth in most countries. Errors in measuring capital or in measuring the elasticity of output with respect to capital are unlikely to substantially reduce the role of TFP in explaining growth. The pattern of growth in these 18 countries is more consistent with an underlying two-sector model than with the one-sector (Solow) model. Standard theory suggests that TFP growth induces capital accumulation, at least in the long run. This is not the case with the raw EU KLEMS data used here. But standard theory finds some support when the data are smoothed to remove cyclical effects.