--%>

Explain growth accounting.

Economic growth is measured by the rate of increase in national output, GDP. The output depends on inputs -labour, capital technology etc. the theories of economic growth bring out how and to what extent each input or factor contributes to the growth process. For understanding growth theories therefore, it is important to understand how the relative share or constitution of each theory therefore it is important to understand how the relative share or contribution of each factor to the growth of output is determined. The answer to this question is provided by the production function. In fact, theories of economic growth use production function to explain the process of economic growth some economists call it growth accounting.

The production function used widely in growth analysis is of the following form.

Y = f (L. K. T)

Where Y = total output L = labour K = capital and T = technology

To begin the analysis of growth accounting, let us assume cob-bugles type of linear homogenous production function. A linear homogenous production function, also called homogenous production function of degree I, is one n which all the inputs (L and K) increase in the same proportion and this proportion can be factored out. Given these conditions the production function can be expressed as 

KY = f (KL, KK)

KY = K (L, K)

For example, if both L and K are doubled, ten total productions, Y, are also doubled. In that case, production function can be written as 

2Y = f(21. 2K)

2Y = 2(L< K)

From the growth accounting point view, estimation of the relative share of labour and capital in output growth (?Y/Y) is required.

In case labour and capital are increased at different rates, the relative share of L and K in income growth rate (?Y/Y) can be estimated as follows.

?Y/Y =. ?L/L + (1 -α) ?K/K

Where α denotes the share of and (L - α) denoted the share of in total input, and 

α + (1 -α) = 1

For a numerical example, suppose labour growth (?L/L) is 3 percent, capital growth rate (?K/K)is 5 percent and α = 0.75 then,

?Y/Y = 0.75 (3) + (- 0.75)5

= 2.25 + 1.25 = 35

Given the parameters, the GDP growth rate (?Y/Y) turns out to 3.5 percent of which 2.25percent is the share of labour and 1.25 percent is the share of capital.

Inadditons to the growth resulting form increase in L and K. there is another factor that adds to growth rate, the total factor productivity measured as ?T/T. the total factor productivity is the increase in total production due to improvement in technology, all other inputs remaining the same. We have so far assumed technology to be given. Let us now suppose that production technology is improved over time along with increase in L and K, it implies that technological improvement contributes to growth rate of output in addition to growth resulting form increase in L and K with addition of change in technology (?T/T).

?Y/Y =α. ?L/L + (1 -α) ?T/T

Suppose technology productivity is estimated to be 1.0 percent ?T/T = 1. Then growth rate can be estimated by applying Eq.as

?Y/Y = 0.75. 2 + (1 - 0.75)2 + 1.0

= 4.5 percent


Thus, with addition of total factor productivity GDP growth rate rises from 3.5 percent to 4.5 percent, this given an idea of growth accounting. 

   Related Questions in Macroeconomics

  • Q : Transfer of wealth problem The transfer

    The transfer of wealth from developed countries to oil exporting countries (abbreviated as OPEC) which followed sky-rocketing oil prices in the year 1970s points out that the price elasticity of demand for oil was: (i) Unitary. (ii) Relatively high. (

  • Q : Fiscal measures to accurate

    Describe the fiscal measures to accurate the condition of deficient demand and excess demand. Answer: Fiscal measures are the government’s budgetary policy th

  • Q : Problem on perfect replacements Imports

    Imports and American cars are much close however not perfect replacements. When the U.S. govt. tried to enhance American car sales by setting a price ceiling of P1 on imported cars: (i) The quantity of cars imported will drop/fall from Q0 to Q1. (ii)

  • Q : IMF? In saying that the present system

    In saying that the present system of floating exchange rates is managed we mean that: IMF officials determine exchange rates on a day-to-day basis. countries that allow their exchange rate to move freely will lose their borrowing privileges with the IMF. the value of any IMF member's currency

  • Q : Moentary policy a restrictive monetary

    a restrictive monetary policy is designed to shift the

  • Q : Define Devaluation Devaluation means

    Devaluation means decrease in the external value of a country’s currency as an aware policy measure adopted by the Government of a country. In another words, we make our currency less costly in terms of foreign currency. This builds our goods ch

  • Q : Estimating rational income How will you

    How will you treat the given in estimating rational income of India? Provide reasons for your answer. (i) The value of bonus shares received by the shareholders of a company.(ii) Interest received on loan pro

  • Q : The Fed can control the Fed funds rate

    Question: Hubbard argues that the Fed can control the Fed funds rate, but the interest rate that is important for the economy is a longer-term real rate of interest.   How much control does the Fed have o

  • Q : Explain Tax rate increase. A change in

    A change in tax rate changes the IS equation, LM equation remaining the same. Let same, let us suppose that the government raises the tax rate from 20 percent to 25 percent<

  • Q : Consumer Equilibrium of two goods The

    The consumer reaches equilibrium for any two goods X and Y whenever the: (1) MUx/Px = MUy/Py. (2) MUx/MUy = Py/Px. (3) Utility from X equivalents the utility produced by Y. (4) Point of diminishing returns is arrived at. Can someon