--%>

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 : Open-Economy Macroeconomics

    Open-Economy Macroeconomics   Suppose the structure of an economy with a flexible exchange rates is represented by:   C = 200 + 0.85*(Y - T)             &n

  • Q : Type of market when people cannot buy

    Whenever people can’t purchase all of a good they are willing and capable to pay for at present market price, there is surely a market: (1) Price ceiling. (2) Price floor. (3) Shortage. (4) Anomaly.  (5) Surplus. Please

  • Q : Domestic Investment & Economies

    Question: How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world, investment in both economi

  • Q : National income Gross domestic capital

    Gross domestic capital formation is always greater than gross fixed capital formation

  • Q : Normative macroeconomic policy

    Widely accepted normative macroeconomic policy objectives include: (w) full employment and economic development. (x) allocative, productive, and distributive efficiency. (y) maximum freedom and economic profits. (z) job security and equality within th

  • 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 SWOT Analysis SWOT Analysis

    SWOT Analysis: SWOT analysis is a powerful tool to know the strengths, weaknesses, opportunities and threats for any company. The company itself does SWOT analysis so as to know where they are standing vis-a-vis their competitors and what are the area

  • Q : Maximizing consumer utility The

    The consumer maximizes the utility whenever spending patterns causes: (i) Total outlays to increase each time prices are altered. (ii) Marginal utilities of each and every good consumed to be equivalent. (iii) Marginal utilities from the last cent spent on each and ev

  • Q : Value added technique for national

    What is the alternative name of value added technique of estimating national income? The alternative name of value added technique of estimating national income is production method.

  • Q : What are the strength and weakness What

    What are the strength and weakness of using per capital national income? give explained answer for query