Question

Use the growth accounting equation to calculate productivity growth, given output growth of 4.5%, capital stock growth of 4%. labor employment growth of 3%, the output elasticity of capital of 0.3, and the output elasticity of labor of 0.7.

Answer 1

Answer

Growth accounting equation is given by :

$%\Delta Y = %\Delta A + e_l$%$\Delta$Y = %$\Delta$A + e_L(%$\Delta$L) + e_K(%$\Delta$K)

where %$\Delta$Y = Output growth rate = 4.5%, %$\Delta$K = capital stock growth of 4%, %$\Delta$L = labor employment growth = 3%, e_K = the output elasticity of capital = 0.3 and the e_L = output elasticity of labor = 0.7. %$\Delta$A = Productivity growth that we have to calculate.

Using above information and growth accounting equation we get :

4.5 = %$\Delta$A + 0.3*4 + 0.7*3

=> %$\Delta$A = 4.5 - (0.3*4 + 0.7*3) = 1.2

=> Productivity growth rate = %$\Delta$A = 1.2%

Hence, Productivity growth = 1.2%