Economic Theory and Index Numbers

Abstract

This chapter is primarily devoted to a detailed examination of the economic-theoretic foundations of the various index numbers discussed in Chapter 4. Given the importance attached to index numbers in TFP measurement, it is hardly surprising that economic theory is extremely relevant in understanding what these index numbers actually measure and in making a proper application of the formulae described. This chapter is also important in that it provides a base from which we integrate the three principal approaches, viz., the index number, DEA and stochastic frontier approaches, in the context of productivity and efficiency measurement.