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Growth Accounting

Gallina Vincelette and Fritzi Koehler


(PRMED)
August 2009
World Bank Kiev, Ukraine
Objectives of Growth Accounting

• Describe the contributions of the


production factors capital and labor, and
of productivity growth to economic
growth

• Interpret economic data with the help of


an empirical tool that is based on specific
assumptions

• Understand the nature of economic


growth better
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Basic Methodology

• Decomposition of output growth into a


weighted average of the rate of growth of
labor and capital, and a residual = total
factor productivity / “Solow residual”

• Based on a aggregate production function


that serves as a framework

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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

with α being the capital share of income


By assumption, output changes, can only be caused
by changes in the capital stock, the labor force, or
changes in total factor productivity
Growth Accounting at Work
• Taking logarithms and differentiating allows to
rewrite the Cobb-Douglas function as:

lnYt  lnYt1  ln At  ln At 1 (lnKt  ln Kt 1)  (1)(lnLt  ln Lt 1)

• In the real world this translates into:

GDPgrowth  TFPgrowth  S K * Capgrowth  (1  S K ) * Laborgrowt h

Real value added Capital share Labor share


growth Estimated of income Capital stock of income Labor force
as residual growth growth
Caveats and limitations
• Total factor productivity calculated as residual
Measurement errors in the variables to measure
labor and capital are mechanically imputed to TFP

• Growth accounting is a descriptive tool


Does not provide insight into nature of TFP growth
(technological, structural, and/or institutional
change)

• Depends to some extend on assumption of


independence between employment growth, capital
accumulation, and productivity growth
Use

Use growth accounting with care for descriptive


purposes

don’t “over-interpret”, eg. TFP as dependent


variable in regressions is questionable

apply reality checks when measuring output, capital


stock, labor force, and capital share of income

Cross check with other types of analysis


Changes in Output

• Measure of output = Real Ukraine: Real GDP 1992-


GDP 2008
2 15%
1.8 10%
• Take logarithms and 1.6 5%
differentiate 1.4
0%
1.2
-5%
1
• Sources: State Statistics 0.8
-10%

Committee of Ukraine, 0.6


-15%

WDI World Bank, WEO 0.4 -20%

IMF 0.2 -25%

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

• Capital Stock based on SSCU data, PIM (remember


training on RoRKs):

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%

Ukraine: Capacity Utilization 12%

10%
2002 2003 2004 2005 2006 2007 2008 8%

0.77 0.80 0.86 0.84 0.84 0.85 0.86 6%

4%

• Take logarithms 2%

and differentiate 0%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Real capital stock, percent change

Real capital stock adjusted for capacity utilization,


percent change

10a
Changes in Labor
Labor Force
• Measure of Labor= Labor 8% 26
force

Labor Force, percent change


4%

Labor Force, millions


25

• Sources: State Statistics 0%

Committee of Ukraine, WDI -4% 24


World Bank
-8%
23
• Here: WDI -12%

-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

• Different methodologies (remember training on


RoRKS)

• Rule of thumb, regression analysis as for example in


B&G or Gollin, or dynamic shares.

• Here: Rule of thumb (0.4/0.6) and dynamic shares

• Dynamic shares: Capital share of income=


capital income/(GDP -net taxes on production and import)

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

GDP growth due to changes


GDP
• Estimated as residual from growth
capital labor TFP
the production function
with dynamic capital 2003-2008 0.40 0.26 0.00 0.14
shares 2003-2004 0.21 0.11 0.00 0.10
2005-2008 0.19 0.15 0.00 0.04

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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

% real value added growth


% changes in production factors

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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