101 Concepts for the Level I Exam

Essential Concept 16: Growth Accounting Relations

Growth accounting is used to analyze the performance of economies. The growth accounting equation is as follows:

\Delta$Y/Y = $\Delta$A/A + $\alpha$$\Delta$K/K + (1 -- $\alpha$) $\Delta$L/L {\quad}

i.e. growth rate of output = rate of technological change + α (growth rate of capital) + (1 – α) (growth rate of labor).
An alternative method of measuring potential GDP is the labor productivity growth accounting equation. Under this approach, the equation for estimating the potential GDP is:
Growth rate in potential GDP = Long-term growth rate of labor force + Long-term growth rate in labor productivity.

The growth accounting equation is used to:

  1. Estimate contribution of technological progress
  2. Measure sources of growth
  3. Measure potential output