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Concept
Growth accounting
Summary
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. Growth accounting decomposes the growth rate of an economy's total output into that which is due to increases in the contributing amount of the 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.
This methodology was introduced by Robert Solow and Trevor Swan in 1957. Growth accounting was proposed for management accounting in the 1980s. but they did not gain on as management tools. The reason is clear. The production functions are understood and formulated differently in growth accounting and management accounting. In growth accounting the production function is formulated as a function OUTPUT=F (INPUT), which formulation leads to maximize the average productivity ratio OUTPUT/INPUT. Average productivity has never been accepted in management accounting (in business) as a performance criterion or an objective to be maximized because it would mean the end of the profitable business. Instead the production function is formulated as a function INCOME=F(OUTPUT-INPUT) which is to be maximized. The name of the game is to maximize income, not to maximize productivity or production.
The growth accounting model is normally expressed in the form of the exponential growth function.
Official source
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