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The Production Function
• Neoclassical production function output at time t,
Yt, is a function of the economy’s capital stock, Kt,
its labor force, Lt, and the economy’s total factor
productivity, At
• In a Cobb-Douglas specification this is:
(1 )
Yt At * K * L
t t
0 1992 -30%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
• Here: State Statistics
Committee of Ukraine GDP, constant 2001, LCU
GDP, constant 2001, percent change
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Changes in the Capital Stock
Kt+1 = Kt + It − Dt
• Assumptions:
1. K0/Y0 ratio = 1.83
2. Depreciation = 0.04
3. Adjustment for capacity utilization Kt= CU*Kut
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Changes in the Capital Stock,
Adjustment for Capacity
Utilization
• Adjustment for capacity utilization Kt= CU*Kut
Real Capital Stock 1997-
2008
14%
10%
2002 2003 2004 2005 2006 2007 2008 8%
4%
• Take logarithms 2%
and differentiate 0%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Real capital stock, percent change
10a
Changes in Labor
Labor Force
• Measure of Labor= Labor 8% 26
force
-16% 22
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
• Take logarithms and
differentiate
Labor force Labor force, percent change
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Capital Share of Income
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Avrg
Capital share 0.39 0.40 0.40 0.46 0.49 0.51 0.48 0.48 0.49 0.44 0.43 0.44 0.44 0.45
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Changes in TFP
GDP growth due to changes in
• Estimated as residual from
the production function GDP
with rule of thumb growth capital labor TFP
capital shares 2003-2008 0.40 0.23 0.00 0.17
2003-2004 0.21 0.09 0.00 0.12
2005-2008 0.19 0.14 0.00 0.05
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Application to Ukraine:
Results
Real value added growth Growth accounting,
explained by factors of adjusted for capacity
production utilization
0.07 0.12
100%
0.06
0.05 0.1
80%
0.04 percent real value
0.03 0.08
60% added growth rate
0.02 explained by TFP
0.06
0.01 40%
0 0.04 percent real value
-0.01 20% added growth rate
-0.02 0.02 explained by labor
-0.03 0% force
-0.04 0 percent real value
-20% added growth rate
2003
2004
2005
2006
2007
2008
explained by capital
-40% stock
2003
2004
2005
2006
2007
2008
changes in capital stock changes in labor force
productivity growth real value added growth
Selected References
Abramovitz, M. (1956), "Resource and Output Trends in the United States
since 1870", American Economic Review, Vol. 46
Bernanke, B. S., & Gürkaynak, R. S. (July 2001). Is Growth Exogenous?
Taking Mankiw, Romer, and Weill Seriously. NBER Working Paper No.
8365 , S. 1-54.
Gollin, D. (April 2002). Getting Income Shares Right. The Journal of Political
Economy , S. 458-474.
Izyumov, A., & Vahaly, J. (2008). Old Capital vs. New Investment in Post-
Soviet Economies: Conceptual Issues and Estimates. Comparative
Economic Studies, 50 , pp. 79-110.
Solow, R. (1957), "Technical Change and the Aggregate Production
Function", Review of Economics and Statistics, Vol. 39, pp. 312-20
Tinbergen, J. (1942), „Zur Theorie der Langfristigen
Wirtschaftsentwicklung“,
(On the Theory of Long-Term Economic Growth), Weltwirtschaftliches
Archiv, Vol. 55, pp.511-549.
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