Growth Accounting
What Is Growth Accounting?
Growth accounting is a quantitative instrument used to break down how specific factors add to economic growth. Growth accounting centers around three primary factors: the labor market, capital, and technology.
Understanding Growth Accounting
The concept of growth accounting was presented by Robert Solow in 1957. Solow was an American economist and a Professor Emeritus at the Massachusetts Institute of Technology. His concept has likewise been alluded to as the Solow residual.
Solow gave economists an instrument for quantitatively breaking down gross domestic product (GDP), the primary economic growth statistic. With the growth accounting model, Solow brought innovative progression onto the stage as a GDP giver. Prior to 1957, economists had basically centered around the effects of labor and capital investments.
The growth accounting equation is a weighted average of the growth rates of the factors in question. Solow's economic growth accounting model glances at three factors: labor market growth, capital investment, and technology. Capital investment is much of the time the key component acquired from statistical data releases. Solow likewise presented mechanical progress as a third factor to make sense of the residual gap.
The Growth Accounting Equation
To ascertain the growth accounting equation, economists must get the accompanying key data points:
- GDP: annual growth and annual GDP
- Labor: annual growth and annual contribution
- Capital: annual growth and annual contribution
The growth accounting equation is as per the following:
GDP Growth = Capital Growth(Weight of Capital Contribution) + Labor Growth(Weight of Labor Contribution) + Technological Progress**
Labor growth accounts until the end of contributions after capital or vice versa relying upon the data utilized. Mechanical progress is the residual growth. Without mechanical progress, the equation wouldn't balance. With mechanical progress, the equation shows what technology is meaning for production.
Growth Accounting Factors
While the growth accounting equation can appear to be to some degree simple, recognizing the data factors and working out it tends to be monotonous. The Conference Board (CB) can help as it gives an annual breakdown of economic growth accounting by region.
Below is a glance at the growth accounting factors alongside one-year data results for 2018.
GDP: Annual GDP is reported by the Bureau of Economic Analysis (BEA). In 2018, U.S. GDP was $20.5 trillion while the GDP growth rate was 2.90%.
Capital: Adding capital to the economy ought to, in addition to other things, increase productivity. Capital investment is of key significance to the growth accounting equation since it can undoubtedly be acquired from the BEA's GDP reporting. In 2018, capital investment was $3.65 trillion for a capital contribution of 17.82%. Capital investment developed from $3.25 trillion out of 2017 for a growth rate of 13%.
Labor: Labor takes a gander at the number of individuals employed to distinguish a growth rate. Regularly, more workers will generate more economic goods and services. In 2018, the U.S. labor market of full-time workers developed from 125.97 million to 128.57 million or 2.06%. Its weight is recognized by deducting the capital weight, taking into account that capital and labor are the main two factors. In 2018, labor would have had a weight of 82.18%.
Technology: In the growth accounting equation, technology is a third residual factor. State of the art technology can bring many benefits, incorporating facilitating greater output with a similar stock of capital goods.
Utilizing 2018 for instance, Solow's growth accounting model can be calculated as:
2.90% = 13%(17.82%) + 2.06%(82.18%) + Technological Progress
The technology factor ends up being - 1.11% in 2018.
The CB utilizes a two-year average for certain marginally various data pulls.
Different Considerations
Growth accounting is generally utilized by economists as one method for breaking down the percentage of a country's economic growth coming from key factors. Solow's economic growth accounting model ganders at three key factors which give a simplified view.
The BEA likewise gives contribution values involving a comparable methodology to Solow in its customary GDP reports however with additional factors. In 2018, the BEA showed the accompanying contributions to GDP growth:
Features
- Growth accounting is a quantitative device used to break down how specific factors add to total GDP growth.
- The concept of growth accounting was presented by Robert Solow in 1957.
- The growth accounting equation basically sees three factors: labor, capital, and technology.
