# Economics 302 Spring 2012 University of Wisconsin-Madison

Menzie D. Chinn Social Sciences 7418

Algebra for the Growth Accounting Formula This exposition is based on the Appendix to Chapter 12. Suppose technology is held constant, and set to 1. Then the production function is given by:

Y = F (K , N ) Take the partial differential with respect to time t, holding constant capital.

∂Y / ∂t = (W / P)(∂N / ∂t )
Divide both sides by Y; and divide and multiply the right hand side by N. (∂Y / ∂t ) / Y = (WN / PY )[(∂N / ∂t ) / N ] Notice that the term (WN/PY) is the labor share of total income. Denote the labor share as α. Then
g Y = αg N

There is a comparable expression for capital (holding labor constant). (∂Y / ∂t ) / Y = (r K K / Y )[(∂K / ∂t ) / K ] Letting the percentage growth rates as gi.
g Y = (1 − α ) g K

Putting both together:
g Y = αg N + (1 − α ) g K

Now suppose that the production function is given by:

Y = F ( K , AN )
Then:
g Y = αg A + αg N + (1 − α ) g K

(12.3)

(i)

The Solow residual is defined as:
residual = g Y − [α g N + (1 − α ) g K ]

e302uw_growthaccounting_s11.06 . Hall and Papell.03 .01 90 92 94 96 98 00 02 04 06 08 10 Labor productivity growth.00 -. This expression indicates that output per hour can rise because of improving technology (the A term) or because of capital deepening. 4 qtr change Output per hour in nonfarm business sector.04 . Macroeconomics (Norton. g Y − g N = αg A + (1 − α )[ g K − g N ] (ii) Where the left hand side is the growth rate of labor productivity and the term in the [square brackets] on the right hand side is the growth rate of capital per unit labor. 2006). .One can re-express (i) in per capita terms.07 .4.pdf 26. Source: BLS via FREDII.01 .05 .2011 .02 .