Growth accounting
Growth accounting is a procedure used in economics to measure the contribution of different factors to economic growth and to indirectly compute the rate of technological progress, measured as a residual, in an economy. This methodology was introduced by Robert Solow in 1957.
Growth accounting decomposes the growth rate of economy's total output into that which is due to increases in the amount of factors used—usually the increase in the amount of capital and labor—and that which cannot be accounted for by observable changes in factor utilization. The unexplained part of growth in GDP is then taken to represent increases in productivity (getting more output with the same amounts of inputs) or a measure of broadly defined technological progress.
The technique has been applied to virtually every economy in the world and a common finding is that observed levels of economic growth cannot be explained simply by changes in the stock of capital in the economy or population and labor force growth rates. Hence, technological progress plays a key role in the economic growth of nations, or the lack of it.
As an abstract example consider an economy whose total output (GDP) grows at 3% per year. Over the same period its capital stock grows at 6% per year and its labor force by 1%. The contribution of the growth rate of capital to output is equal to that growth rate weighted by the share of capital in total output and the contribution of labor is given by the growth rate of labor weighted by labor's share in income. If capital's share in output is 1⁄3, then labor's share is 2⁄3 (assuming these are the only two factors of production). This means that the portion of growth in output which is due to changes in factors is .06×( 1⁄3)+.01×( 2⁄3)=.027 or 2.7%. This means that there is still 0.3% of the growth in output that cannot be accounted for. This remainder is the increase in the productivity of factors that happened over the period, or the measure of technological progress during this time.
The total output of an economy is modeled as being produced by various factors of production, with capital and labor being the primary ones in modern economies (although land and natural resources can also be included). This is usually captured by an aggregate production function:
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