Growth accounting
Topic: Economic Growth Theories and Business Cycles · NCERT: Beyond NCERT
Meaning
Growth accounting splits GDP growth into three parts: the contribution of more capital, the contribution of more labour, and total factor productivity (TFP). TFP is the part of growth that more capital and labour cannot explain. It reflects better technology, efficiency and innovation, and it is also called the Solow residual. The method shows whether growth is input-driven (piling up capital and workers) or efficiency-driven, which can last longer.
Example
Solow's 1957 study found that about 7/8 of the growth in US output per hour of work (1909-49) came from technical change, not from more capital. In 1994-95, Krugman and Young used growth accounting to argue that East Asia's "miracle" was mostly input-driven and would face diminishing returns. For India, TFP is tracked in the RBI's India KLEMS database.
Don't confuse with
- Labour productivity: this is output per worker, which can rise just from capital deepening. TFP counts only the gains that are left over after the growth of capital and labour is taken out.
Related concepts
- Solow growth model
- Steady state
- Capital deepening
- Total factor productivity
- Convergence
- Endogenous growth theory