Productivity measurement, often skewed by outdated methods, is a critical aspect of economic analysis. Traditional approaches, such as the ‘value-added’ method, may not be suitable for modern economies, particularly those with significant intangible assets. A more accurate approach, the ‘income-based’ method, is suggested, which accounts for labour and capital income.
The ‘value-added’ approach, while simple, may not reflect the true productivity of firms. It can undervalue those with high intangible assets, as it does not account for the value of these assets. This could potentially distort productivity analysis, leading to inaccurate economic assessments.
The ‘income-based’ approach, on the other hand, considers both labour and capital income. This method provides a more accurate reflection of a firm’s productivity, especially those with significant intangible assets. It includes the value of these assets, thus offering a more comprehensive view of a firm’s productivity.
However, the ‘income-based’ approach is not without its challenges. It requires access to detailed firm-level data, which may not be readily available. Nevertheless, it offers a more accurate and comprehensive view of productivity, which is crucial for economic analysis and policy decisions.
In essence, improving productivity measurement is vital to better understand economic performance. The ‘income-based’ approach, despite its challenges, offers a more accurate and comprehensive view of productivity, particularly for firms with substantial intangible assets.
Go to source article: http://www.escoe.ac.uk/getting-productivity-right/