Technological change and welfare in an open economy with distortions

Abstract

Traditional measures of technological change, such as the rate of technical change, are based on producer-oriented prices. Here, we employ a general equilibrium analysis of an open economy to examine how the consumer welfare gain from a technological change, measured as Hicksian equivalent variation, is related to the rate of technical change, the biases of the technological change, and tax distortions in the economy. An analytical solution shows these relationships in a readily computable framework, and demonstrates that the rate of technical change will equal the rate of welfare change in only very unrealistic cases.