Question

The Republic of Ostralya has experienced a 5 percent increase in output this year, a 2 percent rise in its capital stock and a 3 percent increase in total hours worked. Assuming a Cobb-Douglas production function where capital income accounts for 30 percent of GDP.

calculate how much output growth is explained by capital accumulation, labour and total factor productivity

Answer 1

In this case,

Share of capital income==30%=0.30

Growth in capital==2%

Contribution of capital growth in output growth==0.3*2%=0.6%

Labor hours growth==3%

Contribution of labor growth in output growth==(1-0.3)*3%=2.1%

Contribution of TFP (total factor productivity) is given by

=5%-0.3*2%-(1-0.3)*3%

=2.3%