The Growth-Accounting Approach

Growth accounting usually begins with the ago aggregate production function we .met earlier in this chapter. Q = AF( K. L. R) ..Often resources are omit· ted because land is constant. Using elementary calculus and some simplifying assumptions, we can express the growth of output in terms of the growth of the inputs plus the contribution of technological change. Growth in output (Q) can be decomposed into three separate terms: growth in labor (L} times its weight. growth in capital (K) times its weight, and technological innovation itself (T.G.).

Momentarily ignoring technological change, an assumption of constant returns to scale means that a 1 percent growth in L together with a 1 percent in K will lead to a 1 percent growth in output. But suppose L grows at I percent and 5 percent. It is tempting. but wrong, to guess that Q 11 then grow at 3 percent. the simple aye rage of 1 and 5. Why wrong? Because the tow factors do not necessarily contribute equally to output. Rather. the fact that three-fourths of national income goes to labor while only one-fourth goes to capital suggests that labor growth will contribute more to output than will capital ,growth.

This equation allows lie to answer critically important questions about economic grow-h. What part of per capital output growth is due to capital deepening, and what part is due to technological advance? Does society progress chiefly by dint of thrift and the forgoing of current consumption? Or is our rising living standard the reward for the ingenuity of inventors and the daring of innovator-entrepreneurs.