The Linearized Hamiltonian as Comprehensive NDP

Martin Weitzman

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: For guidance in determining which items should be included in comprehensive NDP and how they should be included, reference is often made to the linearized Hamiltonian from an optimal growth problem. This note shows how the heuristic linearized-Hamiltonian argument can be given a rigorous welfare justification in terms of a money-metric utility function that is "naturally normalized" to be conformable with consumption at the time, of measurement. The implied normalization is of the same type as is required to interpret the "area under the demand curve" as a constant-dollar-denominated true measure of consumer's surplus. The concept of the "sustainability-equivalence principle" is explained, and is indicated why this principle is of basic importance for the theory of national income accounting.

Date: 1998
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Journal Article: The linearised Hamiltonian as comprehensive NDP (2000)
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