The Difference Approach to Productivity Measurement and Exact Indicators

Erwin Diewert | The University of British Columbia

The paper uses the difference approach to Total Factor Productivity measurement in a value added context. The paper develops an exact difference counterpart to the exact index number approach to the measurement of value added productivity growth that was developed by Diewert and Morrison (1986) and the same assumptions on economic behavior are assumed; i.e., constant returns to scale in production, price taking behavior and no technical inefficiency. The underlying flexible functional form that is used in the difference context is based on the normalized quadratic functional form introduced by Diewert and Wales (1987).