A 'Model consistent' approach to productivity measurement

Many models (including computable general equilibrium and growth models) have optimising behaviour underlying them as an organising feature to enhance efficiency in estimation (for example, cross-equation restrictions and tighter specification). However, model microeconomic foundations are not fully exploited to allow the examination of productivity issues. This paper evaluates performance using criteria consistent with the posited objective functions of the economic actors in the models. Clearly, there exists an opportunity to exploit the optimising objective more explicity so as to enable the derivation of 'model consistent' productivity measures, to enable a closer link with policy through identification of parameters that influence economic actors' objectives. This paper sets out a method for the development of objective function-based productivity measures. The method is generalisable to cases where there are links between production and consumption, for example, 'productive consumption'. Data relevant to the information and communications technology (ICT) sector are used to illustrate the approach.