A Welfare-Based Approach to Aggregating Growth Rates across Countries
Aggregating per capita gross domestic product growth across countries has always been a technical problem due to complexities in the relative movements of exchange rates, economic output, and populations. As such, the conventional approach to aggregating growth across countries suffers from sensitivity to exchange rates, as well as from the possibility of aggregate growth rates not being convex combinations of individual growth rates.
This paper introduces a new methodology in aggregating per capita growth rates that does not suffer from the drawbacks of the conventional approach. Using a welfare-based approach, it is shown that the proposed methodology is robust with respect to exchange rates and generates weights that always add up to unity, thus avoiding the anomalies that are inherent in the conventional approach. The methodology proposed in the paper is applied to calculate aggregate growth rates of 33 developing member countries as well as five regional groupings, and the results are compared with those arising from the conventional approach. A number of insights arise that were previously hidden or inaccessible.
- The Conventional Approach
- A New Approach Based on a Welfare Function
- Empirical Illustration