An exact measure of welfare change

This paper develops a measure of the change in welfare of a household or an economy due to exogenous shocks or policy changes. The measure can be applied in a wide range of economies, including those without distortions, and those with distortions due to economies of scale, imperfectly competitive markets, unemployment, and domestic distor- tionary taxes. The welfare change measure is decomposed into five terms, which identify the five sources of welfare impacts: tax revenue, international transfer and borrowing, terms of trade, consumption substitution, and production substitution. The measure is simple to inter- pret and easy to apply in practice. All statistical data and information required to compute these terms are generally available or can be estimated easily.

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