The Quality of Intermediate Goods: Growth and Welfare Implications

Abstract

TaiwanThis paper explores the implications of the quality of intermediate goods in an endogenous growth model. We show that a trade-off exists between the quality and the variety of products, which creates a wedge between the market-equilibrium quality and the socially optimal quality. Relative to the social optimum, the equilibrium quality could be either under-supplied or over-supplied, depending on the productivity-enhancing effect as well as the increasing returns to production specialisation and business-stealing effects. ) estimates an annual quality growth for durables of about 5 per cent since 1988.The importance of quality growth as a component of GDP growth seems to have increased over time. 2 It was shown using the EU KLEMS Database in 2007 that during the period 1970-2004 this share lay between 0.4 and 0.6