It discusses growth accounting and Total Factor Productivity (TFP). This approach is very useful for LDC country in order to have sustained high rate of growth.

1. Basics of Growth Accounting
Tara Nath Adhikari
taranathadhikarinepal@gmail.com
MPA (TU, Nepal), MA (KHU, South Korea)

2. Introduction
• Growth accounting is process of measuring
which specific factors contribute most to the
economic growth.
• GA is decomposition of the growth rate of
output into contributions of individual factors
of production.
• The role of TFP growth in the output growth of
national economy is estimated.

3. Objectives of GA
• To explain whether an economy is expanding
because of increase in capital or labor or
technical progress,
• To provide empirical framework fort he
interpretation of economic growth

4. Total Factor Productivity
• TFP measures residual growth in total output
of national economy that cannot be explained
by the accumulation of traditional inputs such
as labor and capital.

5. Growth Accounting Equation
• Consider a production function; Y = F (A,K,L).
• Differentiating with respect to time, dividing by Y
and rearranging the terms, we get the equation of
growth accounting;
• Yg = FA A/y A*/A + SK kg + SL Lg
• Hence, growth of total factor productivity can be
written as, Yg - SK kg - SL Lg
• Where FA A/y A*/A is known as Solow Residual or
growth of total factor productivity.

6. Growth Accounting Equation
• Yg , SK, kg ,SL and Lg are all observable and can be
measured using standard national income accounting
methods (with capital stock accumulation being
measured using investment rates).
• Sk kg and SL Lg represents contribution of capital to the
output growth and contribution of labor to the output
growth.
• The term FA A/y A*/A however is not directly
observable as it captures technological growth and
improvement in productivity that are unrelated to
change in use of factors.

7. Growth Accounting with Cobb-Douglas
Production Function
• Yt = At (Kt )a (Lt )1-a
• Taking log on Yt and Yt-1 on both sides and
subtracting, we get;
• lnYt–lnyt-1=lnAt–lnAt-1+a(lnKt–lnKt-1)+(1-a)(lnLt–lnLt-1)
• Differentiating wrt to Y, we have;
• GDP growth= TFP growth + a.capital stock growth+
(1-a).labor force growth

8. Analysis of Decomposition
• Let us keep other things constant and L as input only. Then
national output grows by MPL times labor growth dL
• dY = MPL. dL = w.dL
• dY/Y =w.L/Y .dL/L
• Output growth contributed by labor is equal to the labor
share times labor growth rate.
• Similarly, we can get that growth contributed by capital is
equal to the capital share times the capital growth rate.
• Solow’s residual measure of technical change is the
unexplained rate of output growth, i.e., the growth rate of
output less the contribution from the inputs.
• Hence, we can conclude that technical change is a key
determinant of economic growth and per capita income

9. Growth Accounting ( Primal or Dual)
• The primal approach of GA calculates technical
change by measuring inputs based on quantities.
• The dual approach is based on factor prices.
• The dual approach is better because prices are
formed at markets and agents which have
incentive to get the right price.

10. Policy Recommendations
• Government should compute TFP and sources of
growth on a regular basis, for which it should upgrade
database.
• TFP growth should be decomposed in some possible
area such as agriculture, industry, service sector etc,
which will help to making better and more efficient
utilization of resources.
• Economic growth of Least Developed Country (LDC) has
been mainly generated by the additional inputs, rather
than by improving factor productivity.
• Conclusion: Government must accurately estimate TFP
growth and efforts must be made to improve factor
productivity growth.

11. Conclusion
• Technical change is key determinant of economic
growth.
• Growth strategies should encompass generation of
TFP growth because economic growth not
accompanied by productivity growth will not be
sustainable.
• Governments of developing countries must
accurately estimate TFP growth and efforts must be
made to improve factor productivity growth.

12. References
• Annual Reports of APO
• Barro, R (1998), “Notes on Growth Accounting”,
Journal of Economic Growth, 4: 119-137
• Dwivedi, D. N. (2015), Macroeconomics
• Hlousek, Miroslav (2005), Dual approach to growth
accounting, Czech Republic
• Mankiw, N.G.(2012), Principles of Macroeconomics
• Solow, R (1957), “Technical Change and Aggregate
Production Function, Review of Economics and
Statistics , Vol 39, p 312-20