--%>

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 : Surplus of the good Describe when there

    Describe when there will be a surplus of the good?

  • Q : For every value of real GDP planned

    planned investment. planned saving. the difference between planned saving and actual saving. the difference between planned investment and actual saving.

  • Q : Components of aggregate demand What are

    What are the components of aggregate demand (AD)? Answer: The components of AD are as follows:AD = C + I + G + (X - M) By Simplifying AD = C + I, Here C refers to Household consumption demand and I refer

  • Q : Unemployment (a) Do you think that

    (a) Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero?

  • Q : Closed economy Hello. I need help with

    Hello. I need help with my assignment, I was sick and lost alot of time.My submission deadline is tomorrow i need your help i have attached the questions Thanks in advance

  • Q : Define fiscal policy Define fiscal

    Define fiscal policy? Answer: Fiscal policy is the revenue and expenditure policy of government with a view to combat the state of inflationary or deflationary gap

  • Q : Problem on promotion When Sam Sleaze

    When Sam Sleaze sells Terry Tone-deaf a low-quality stereo by promotion as the "top of the line", there is a trouble of: (1) Moral hazard. (2) Irrational ignorance. (3) Adverse choice. (4) Paradox of value. Can someone help me in g

  • 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 : Threats of SWOT analysis Threats of

    Threats of SWOT analysis: • Possible threat from other banks and other financial institutions • There is always a possible threat of market fluctuations. By this we me

  • Q : Tax shifting backward totally A tax

    A tax will be backward-shifted totally when the: (i) demand curve is vertical and the supply curve is slopes up. (ii) demand curve slopes down and the supply curve is vertical. (iii) supply curve is perfectly elastic and the demand cu