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Abstract
It has been argued in the literature that growth accounting may be undertaken by directly differentiating the national income and product accounts identity where total income equals labour’s total compensation and total profits. This paper shows that this is simply an exercise in the manipulation of an accounting identity without necessarily having any theoretical foundation. Simulations show that the estimates of total factor productivity growth resulting from growth accounting performed with aggregate monetary data are not equivalent to the true rate of technological progress implied by the micro‐data. This suggests that results from the orthodox growth accounting approach may be very misleading.
Acknowledgement
We are grateful to Rana Hasan, Franklin M. Fisher and the participants at the conference on ‘Understanding Economic Growth: New Directions in Theory and Policy’, Downing College, Cambridge, UK, 1–3 September 2005, for their comments and suggestions. The usual disclaimer applies. This paper represents the views of the authors and does not represent those of the Asian Development Bank, its Executive Directors, or the countries that they represent.
Notes
1. The national accounts only give data for total wages (W) and total profits (Π) but employment and capital stocks (calculated using the perpetual inventory method) are readily available from many statistical sources such as the OECD and the US Bureau of Labour Statistics.
2. This criticism, in a very sketchy form, can be traced back to the Reder (Citation1943). More recent expositions include Phelps Brown (Citation1957), Shaikh (Citation1980) and Simon (Citation1979).
3. The notation in Barro’s quotations has been changed to make it consistent with that in this paper.
4. Alternatively, the values of one or more of the variables must be adjusted to ensure that the identity holds.
5. Hart suggests that this may possibly be due to a reorganization of labour agreed to by the unions. To the extent that this leads to increased efficiency and output, then the causation could be said to run from right to left.
6. Reder (Citation1943, p. 260) is an exception: ‘in economic theory a production function relates physical quantities of output to quantities of physical input of the factors. But the Cobb–Douglas function … relates the value added in manufacturing, defined as product, to the physical input of labor services (labor) and the value of plant and equipment owned (capital)’ (italics in the original).
7. As a consequence, parameters such as the aggregate elasticity of substitution are meaningless. In the words of Fisher et al. (Citation1977): ‘the elasticity of substitution in these production functions is an “estimate” of nothing; there is no true aggregate parameter to which it corresponds’ (Fisher et al., Citation1977, p. 312).
8. These results extend an earlier simulation based on time‐series data (McCombie, Citation2001).
9. To prevent perfect multicollinearity, a small random variable was added to these and, where necessary, other variables used in the simulation.
10. For example, Douglas (Citation1976, p. 906) reports the following results for a production function based on American cross‐section studies, 1904, 1909, 1914 and 1919.
11. This is because there is no growth in the physical capital‐output ratio, ϕi = α([Qcirc]i − [Lcirc]i ) and α, the physical output elasticity of labour, is equal to 0.25. Hence the rate of technical progress equals one quarter of the growth of labour productivity.
12. This is because while the growth rates of Q and K are the same between firms, employment growth rates differ and so the change in weighting causes the rate of technical change now to differ across firms.
13. As we cannot sum across the physical quantities, we cannot calculate a meaningful average rate of technical progress, as the individual rates cannot be unambiguously or uniquely weighted. Nevertheless, we did calculate the unweighted mean.
14. With a constant mark‐up of 1.333, the shares will be always 0.75 and 0.25, regardless of the technical conditions of production (e.g. the degree of returns to scale).
15. We have adopted a mark‐up pricing policy to generate constant shares in value terms. However, there are any number ways that this could occur (e.g. through a bargaining model or a Kaldorian model of distribution).