Basics of growth accounting
- 1. Basics of Growth Accounting Tara Nath Adhikari [email protected] MPA (TU, Nepal), MA (KHU, South Korea)
- 2. Introduction • Growth accounting is process of measuring which specific factors contribute most to the economic growth. • GA is decomposition of the growth rate of output into contributions of individual factors of production. • The role of TFP growth in the output growth of national economy is estimated.
- 3. Objectives of GA • To explain whether an economy is expanding because of increase in capital or labor or technical progress, • To provide empirical framework fort he interpretation of economic growth
- 4. Total Factor Productivity • TFP measures residual growth in total output of national economy that cannot be explained by the accumulation of traditional inputs such as labor and capital.
- 5. Growth Accounting Equation • Consider a production function; Y = F (A,K,L). • Differentiating with respect to time, dividing by Y and rearranging the terms, we get the equation of growth accounting; • Yg = FA A/y A*/A + SK kg + SL Lg • Hence, growth of total factor productivity can be written as, Yg - SK kg - SL Lg • Where FA A/y A*/A is known as Solow Residual or growth of total factor productivity.
- 6. Growth Accounting Equation • Yg , SK, kg ,SL and Lg are all observable and can be measured using standard national income accounting methods (with capital stock accumulation being measured using investment rates). • Sk kg and SL Lg represents contribution of capital to the output growth and contribution of labor to the output growth. • The term FA A/y A*/A however is not directly observable as it captures technological growth and improvement in productivity that are unrelated to change in use of factors.
- 7. Growth Accounting with Cobb-Douglas Production Function • Yt = At (Kt )a (Lt )1-a • Taking log on Yt and Yt-1 on both sides and subtracting, we get; • lnYt–lnyt-1=lnAt–lnAt-1+a(lnKt–lnKt-1)+(1-a)(lnLt–lnLt-1) • Differentiating wrt to Y, we have; • GDP growth= TFP growth + a.capital stock growth+ (1-a).labor force growth
- 8. Analysis of Decomposition • Let us keep other things constant and L as input only. Then national output grows by MPL times labor growth dL • dY = MPL. dL = w.dL • dY/Y =w.L/Y .dL/L • Output growth contributed by labor is equal to the labor share times labor growth rate. • Similarly, we can get that growth contributed by capital is equal to the capital share times the capital growth rate. • Solow’s residual measure of technical change is the unexplained rate of output growth, i.e., the growth rate of output less the contribution from the inputs. • Hence, we can conclude that technical change is a key determinant of economic growth and per capita income
- 9. Growth Accounting ( Primal or Dual) • The primal approach of GA calculates technical change by measuring inputs based on quantities. • The dual approach is based on factor prices. • The dual approach is better because prices are formed at markets and agents which have incentive to get the right price.
- 10. Policy Recommendations • Government should compute TFP and sources of growth on a regular basis, for which it should upgrade database. • TFP growth should be decomposed in some possible area such as agriculture, industry, service sector etc, which will help to making better and more efficient utilization of resources. • Economic growth of Least Developed Country (LDC) has been mainly generated by the additional inputs, rather than by improving factor productivity. • Conclusion: Government must accurately estimate TFP growth and efforts must be made to improve factor productivity growth.
- 11. Conclusion • Technical change is key determinant of economic growth. • Growth strategies should encompass generation of TFP growth because economic growth not accompanied by productivity growth will not be sustainable. • Governments of developing countries must accurately estimate TFP growth and efforts must be made to improve factor productivity growth.
- 12. References • Annual Reports of APO • Barro, R (1998), “Notes on Growth Accounting”, Journal of Economic Growth, 4: 119-137 • Dwivedi, D. N. (2015), Macroeconomics • Hlousek, Miroslav (2005), Dual approach to growth accounting, Czech Republic • Mankiw, N.G.(2012), Principles of Macroeconomics • Solow, R (1957), “Technical Change and Aggregate Production Function, Review of Economics and Statistics , Vol 39, p 312-20