Welfare and Output with Income Effects and Demand Instability
Abstract/Contents
- Abstract
- We characterize how welfare responds to changes in budget set and technology when preferences are non-homothetic or subject to shocks, in both partial and general equilibrium. We generalize Hulten’s theorem, the basis for constructing aggregate quantity indices, to this context. We show that calculating changes in welfare in response to a shock only requires knowledge of expenditure shares and elasticities of substitution and (given these elasticities) not of income elasticities and taste shocks. We also characterize the gap between changes in welfare and changes in chained indices. We apply our results to long-run and short-run phenomena. In the long-run, we show that structural transformation, if caused by income effects or changes in tastes, is roughly twice as important for welfare than what is implied by standard measures of Baumol’s cost disease. In the short-run, we provide evidence that chain-weighted price indices for non-durable consumer goods understate welfare-relevant inflation because product-level demand shocks are positively correlated with price changes. Finally, using the Covid-19 crisis we illustrate the differences between partial and general equilibrium notions of welfare, and we show that real consumption and real GDP are unreliable metrics for measuring welfare or production.
Description
| Type of resource | text |
|---|---|
| Date created | August 17, 2021 |
Creators/Contributors
| Author | Baqaee, David |
|---|---|
| Author | Burstein, Ariel |
| Organizer of meeting | Auclert, Adrien |
| Organizer of meeting | Mitman, Kurt |
| Organizer of meeting | Tonetti, Christopher |
| Organizer of meeting | Wong, Arlene |
Subjects
| Subject | economics |
|---|---|
| Genre | Text |
| Genre | Working paper |
| Genre | Grey literature |
Bibliographic information
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- User agrees that, where applicable, content will not be used to identify or to otherwise infringe the privacy or confidentiality rights of individuals. Content distributed via the Stanford Digital Repository may be subject to additional license and use restrictions applied by the depositor.
- License
- This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).
Preferred citation
- Preferred citation
- Baqaee, D. and Burstein, A. (2022). Welfare and Output with Income Effects and Demand Instability. Stanford Digital Repository. Available at https://purl.stanford.edu/vv563mp2464
Collection
SITE Conference 2021
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