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Abstract
The problem is to determine the role of value added
information in obtaining a measure of the benefits of
public investment. Net benefit in a benefit/cost analysis is
the change in economic surplus, i.e., the sum of the
increase in consumer surplus and economic rent. An increase
in productivity causes an increase in economic surplus.
Thus, a productivity index is necessary but not sufficient
information needed to measure the change in economic
surplus. Information on value added can be used to establish
productivity. Diewert's quadratic lemma is used to deduce an
index of productivity as the difference between indexes of
value added and its primary components in the context of a
non-homothetic production function. It is concluded that
this same procedure should be used to measure productivity
in either a taut or a slack economy.