| Sumario: | Part of a special issue on service sector productivity and the productivity paradox. Three types of measurement error can explain the productivity paradox. The first error type, which is inherent in the financial accountants' definition of business income, is due to the failure to adjust for the effects of inflation. The second error type is due to the failure of traditional cost accounting to adequately deal with the cost allocation problem, which particularly affects the pricing of the services of durable inputs during high inflation periods. The third error type is the simple mismeasurement of inputs and outputs by statistical agencies. The first two error types contributed to the collapse in productivity growth following dramatic inflation increases in the 1970s, and the third type of error obscured the productivity growth recovery that occurred from the mid 1980s onward.
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