Question

What is growth accounting? To what extent have increases in U.S. real GDP resulted from more labor inputs? From greater labor productivity? Rearrange the following contributors to the growth of productivity in order of their quantitative importance: economies of scale, quantity of capital per worker, improved resource allocation, education and training, and technological advance.

Short answer

Growth accounting is used by economic advisors to assess the supply side factors which contribute to changes in real GDP.

Between 2007 and 2018, the labor input has contributed to about 25 percent of the change in real GDP.

The labor productivity contributed 75 percent to the changes in real GDP for the same decade.

Contributors to the growth of productivity are rearranged below based on quantitative importance:

1. Technological advance

2. Quantity of capital per worker

3. Education and training

4. Economies of scale

5. Improved resource allocation

Step-by-step solution

Step 1. Definition of growth accounting

Economic advisors assess the supply side factors of the economy which contribute to the changes in real GDP. It is a quantitative tool used to evaluate the changes by the supply-side factors such as labor, capital, and technology in the economy.

Step 2. Share of labor input and labor productivity to the economy

Economists divide the supply side factors into two groups: labor input and labor productivity. The extent to which both the groups contribute to the changes in real GDP is explained below:

• Labor input. The quantity of labor force available in the economy at a time is seen as a labor input. It is one of the two groups which contribute to the real GDP. Between 2008 and 2017, the contribution of labor input to the economy was 25 percent.
• Labor productivity: Labor productivity is used to measure the output per hour of the economy. It is increased by investing in technology and human or physical capital. Between 2008 and 2017, the contribution of labor productivity in the economy was 75 percent.

Step 3. The different supply-side factors which contribute to the economy are rearranged below based on quantitative importance:

1. Technological advancement: It is one of the largest contributors to economic growth. It contributes around 40 to productive growth.
2. Quantity of capital per worker: The second most important contributor to economic growth is capital. It is the number of capital goods available to the workers for production. It contributes around 30 percent of the productive growth.
3. Education and training: It refers to the development of knowledge and skills in the workforce. It is estimated that 15 percent of productivity growth comes from the education and training level of the workers.
4. Economies of scale: Economies of scale refer to the reductions in per-unit cost. It contributes around 8 percent to productive growth.
5. Improved resource allocation: when a worker is shifted from a low productive industry to a highly productive industry, it is seen as an improvement in resource allocation. This factor contributes around 7 percent to productive growth.