Question

What do the growth accounting studies conclude are the determinants of growth? Name and describe the determinants of growth according to growth accounting studies. Which is more important, the determinants or how they are combined?

Answer 1

Growth accounting concludes that there are three determinants of growth:

• Physical Capital- It is the effect on growth due to higher physical inputs in the production such as machines.
• Human Capital- It is the effect on growth due to the higher quality of labour. A highly skilled labour is likely to produce more output than a low skilled labour, human capital captures the effect of the quality of labour.
• Technology (Residual)- Both of the above can be measured/ estimated in some form, whatever portion of the growth is left unexplained is shown to be due to the technological factor. Technology makes the biggest contribution to overall growth.

None of the above factors of growth present separately would mean anything. For example, if labour is given a better technology productivity will increase. However, labour or technology kept separate mean nothing for the economy.