--%>

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 : POSSIBILITIES Possibilities Food

    Possibilities Food (millions of tons per year) Tractors (millions per year) A 0 30 B 4 28 C 8 24 D 12 20 E 16 14 F 20 8 G 24 0 a. Is it possible for this nation to produce thirty million tons of food per year? Why or why not. b. Is it possible for this nation to produce thirty million

  • Q : Problem on rational consumption

    Whenever you dine at an “all-you-can-eat” buffet, the rational consumption prototype is to carry on eating till: (1) The restaurant goes bankrupt. (2) You have eaten as much food as it would encompass cost had you made your own meal at hom

  • Q : Physical quality of life index DISCUSS

    DISCUSS the experience of high GNP countries and low GNP with regard to PQLI.

  • Q : Fiscal Monetary changes With the

    With the general equilibrium framework in place, the stage is now set for introducing fiscal and monetary changes and analysing their effects on the general equilibrium. We will first introduce a fiscal change in the form of increase in deficit-financed expenditure, a

  • Q : How commercial bank make money How does

    How does a commercial bank make money? Answer: Commercial banks are capable to make credit that is many times greater than deposits received by banks. Money creatio

  • Q : Define bank rate policy Define bank

    Define bank rate policy? How does it operate as a technique of credit control? Answer: Bank rate is the rate at which the central bank provides loans to the commerc

  • Q : Inflation Effect The economic effects

    The economic effects of inflation are all pervasive. It affects all those who depend on the market for their livelihood. The effects of inflation may be favorable or unfavorable, and low or high depending on the rate of inflation. For example a galloping the hyper inf

  • Q : Market Supply versus Individual Supply

    What is the basic difference between Market Supply and Individual Supply?

  • 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 : Meaning of Cash Reserve Ratio or CRR

    Meaning of Cash Reserve Ratio (CRR): It is the percentage of net or total deposits of commercial bank that are maintained by RBI.