Definition
Welfare Decomposition: Decompose a given change in the welfare of consumers (or representative consumer of the entire region), usually denoted as EV, into various constituent parts.
Four major sources of welfare change:
- Allocative efficiency effect
- Welfare change due to reallocation of existing resources
- Endowment effect
- Welfare change due to change in the amount of resource endowment
- Technology effect
- Welfare change due to technological improvements
- Terms of trade effect
- Welfare change due to more favorable price of export, or less favorable price of imports, because of trade