Domar aggregation

Last updated

Domar aggregation is an approach to aggregating growth measures associated with industries to make larger sector or national aggregate growth rates. The issue comes up in the context of national accounts and multifactor productivity (MFP) statistics. [1]

Contents

The objective is to construct the growth rate of an aggregate MFP residual, a sector or national total, as a weighted average of the growth rates of the MFP residuals of its component industries or firms, usually to discuss how industry-specific changes affected the aggregate. The weights on each industry are called Domar weights. The Domar weight for each industry when adding their MFPs together is the ratio of the nominal value of each industry's gross output to GDP, the sum of value-added output of all the industries together. [2] [3] The objective is to properly account for effects of productivity changes in intermediate goods and industries whose goods are both output and inputs for other industries. The term "market value of the industry's output" can be used in place of the accounting term "gross output." [2] [4]

By construction, Domar weights sum up to a figure larger than 1.0, because the revenue of some firms comes from the sales of intermediate to other firms so some revenues are multiply counted in the firm by firm accounting, in the numerators of the Domar weights, but are netted out in GDP. Example: a tire-maker's sales might go mainly to the makers of cars, trucks, bicycles, and so forth who sell their products with tires included, so tire revenues are multiply counted. [2]

History

This methodology was introduced by Evsey Domar (1961). [5] Economist Charles Hulten developed this theory more formally in a model of a closed economy. [2] [3]

Hulten (1978) used "observed expenditure shares" as weights, and in that model "the first-order impact on output of a TFP shock to a firm or an industry is equal to that industry or firm’s sales as a share of output." [6] Hulten's framing became standard.

National accounting variations

Reinsdorf and Yuskavage (2010, p. 88) evaluate several ways to summarize and decompose industry and regional data to national data flows on productivity change:

A Domar weighted decomposition of translog aggregate multi-factor productivity growth that includes reallocation effects was developed by Jorgenson, Gollop and Fraumeni (1987, p. 66) and used in modified form by Jorgenson, Ho and Stiroh (2002, p. 9.)

Domar weights are ratios . . . of industry gross output to aggregate value added. Domar weights are required to decompose multifactor productivity growth (see [Gullickson] and Harper, 1999, p. 51.) . . . The Domar contribution of an industry to productivity change can be described as the sum of an output change contribution and an input change contribution. . . . [7]

In the models of Baqaee and Farhi, revenue-based Domar weights are defined for producer firms by their "sales share", their revenue divided by GDP, the traditional Domar weight. In these models, which include price/cost markups by the producing firms (imperfect competition), the authors show that an analogous concept which they call cost-based Domar weights more accurately apportions productivity when aggregating to the national aggregate level. In a simpler model, Hall (1990) had a similar result. The Baqaee-Farhi approach enables a growth accounting in which (1) input factors like labor, capital, and energy can have Domar weights, just as industries or firms do, and (2) it is possible to separately estimate effects of overall technological improvement and of "allocative efficiency" which is higher in perfect competition and lower if price-to-cost markups are large. [8] [9] Markups tend to be higher to the extent that oligopolistic firms have market power.

Related Research Articles

<span class="mw-page-title-main">Macroeconomics</span> Study of an economy as a whole

Macroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study topics such as output/GDP and national income, unemployment, price indices and inflation, consumption, saving, investment, energy, international trade, and international finance.

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 or a measure of broadly defined technological progress.

Capital intensity is the amount of fixed or real capital present in relation to other factors of production, especially labor. At the level of either a production process or the aggregate economy, it may be estimated by the capital to labor ratio, such as from the points along a capital/labor isoquant.

<span class="mw-page-title-main">Production function</span> Used to define marginal product and to distinguish allocative efficiency

In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, a key focus of economics. One important purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it.

Productivity is the efficiency of production of goods or services expressed by some measure. Measurements of productivity are often expressed as a ratio of an aggregate output to a single input or an aggregate input used in a production process, i.e. output per unit of input, typically over a specific period of time. The most common example is the (aggregate) labour productivity measure, one example of which is GDP per worker. There are many different definitions of productivity and the choice among them depends on the purpose of the productivity measurement and data availability. The key source of difference between various productivity measures is also usually related to how the outputs and the inputs are aggregated to obtain such a ratio-type measure of productivity.

The Solow residual is a number describing empirical productivity growth in an economy from year to year and decade to decade. Robert Solow, the Nobel Memorial Prize in Economic Sciences-winning economist, defined rising productivity as rising output with constant capital and labor input. It is a "residual" because it is the part of growth that is not accounted for by measures of capital accumulation or increased labor input. Increased physical throughput – i.e. environmental resources – is specifically excluded from the calculation; thus some portion of the residual can be ascribed to increased physical throughput. The example used is for the intracapital substitution of aluminium fixtures for steel during which the inputs do not alter. This differs in almost every other economic circumstance in which there are many other variables. The Solow residual is procyclical and measures of it are now called the rate of growth of multifactor productivity or total factor productivity, though Solow (1957) did not use these terms.

In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output to aggregate inputs. Under some simplifying assumptions about the production technology, growth in TFP becomes the portion of growth in output not explained by growth in traditionally measured inputs of labour and capital used in production. TFP is calculated by dividing output by the weighted geometric average of labour and capital input, with the standard weighting of 0.7 for labour and 0.3 for capital. Total factor productivity is a measure of productive efficiency in that it measures how much output can be produced from a certain amount of inputs. It accounts for part of the differences in cross-country per-capita income. For relatively small percentage changes, the rate of TFP growth can be estimated by subtracting growth rates of labor and capital inputs from the growth rate of output.

The Solow–Swan model or exogenous growth model is an economic model of long-run economic growth. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity largely driven by technological progress. At its core, it is an aggregate production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.

The productivity paradox, also referred to as the Solow paradox, could refer either to the slowdown in productivity growth in the United States in the 1970s and 1980s despite rapid development in the field of information technology (IT) over the same period, or to the slowdown in productivity growth in the United States and developed countries from the 2000s to 2020s; sometimes the newer slowdown is referred to as the productivity slowdown, the productivity puzzle, or the productivity paradox 2.0. The 1970s to 1980s productivity paradox inspired many research efforts at explaining the slowdown, only for the paradox to disappear with renewed productivity growth in the developed countries in the 1990s. However, issues raised by those research efforts remain important in the study of productivity growth in general, and became important again when productivity growth slowed around the world again from the 2000s to the present day.

Evsey David Domar was a Russian American economist, famous as developer of the Harrod–Domar model.

In economics, gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy. "Gross value added is the value of output minus the value of intermediate consumption; it is a measure of the contribution to GDP made by an individual producer, industry or sector; gross value added is the source from which the primary incomes of the System of National Accounts (SNA) are generated and is therefore carried forward into the primary distribution of income account."

Production is the process of combining various inputs, both material and immaterial in order to create output. Ideally this output will be a good or service which has value and contributes to the utility of individuals. The area of economics that focuses on production is called production theory, and it is closely related to the consumption theory of economics.

Productivity in economics is usually measured as the ratio of what is produced to what is used in producing it. Productivity is closely related to the measure of production efficiency. A productivity model is a measurement method which is used in practice for measuring productivity. A productivity model must be able to compute Output / Input when there are many different outputs and inputs.

Profit, in accounting, is an income distributed to the owner in a profitable market production process (business). Profit is a measure of profitability which is the owner's major interest in the income-formation process of market production. There are several profit measures in common use.

Sectoral output for an industry or combination of industries ("sector") is the value of its output sold outside that sector. It is usually calculated as the value of the sector's gross output minus the value of shipments within the sector from one establishment to another.

Infrastructure-based economic development, also called infrastructure-driven development, combines key policy characteristics inherited from the Rooseveltian progressive tradition and neo-Keynesian economics in the United States, France's Gaullist and neo-Colbertist centralized economic planning, Scandinavian social democracy as well as Singaporean and Chinese state capitalism: it holds that a substantial proportion of a nation’s resources must be systematically directed towards long term assets such as transportation, energy and social infrastructure in the name of long term economic efficiency and social equity.

The Cambridge capital controversy, sometimes called "the capital controversy" or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that started in the 1950s and lasted well into the 1960s. The debate concerned the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution. The name arises from the location of the principals involved in the controversy: the debate was largely between economists such as Joan Robinson and Piero Sraffa at the University of Cambridge in England and economists such as Paul Samuelson and Robert Solow at the Massachusetts Institute of Technology, in Cambridge, Massachusetts, United States.

Domar was a mythological king of Sweden.

Alice Orcutt Nakamura is an American-Canadian economist and writer. She is a fellow of the Canadian Economics Association, which is the highest honour of the association. She is currently a professor of finance and management science at the University of Alberta where she has taught since 1972. Alice Nakamura was also the first female president of the Canadian Economics Association in 1994–1995. She was also the president of the International Association for Research on Income and Wealth from 2014 to 2016.

Carol A. Corrado is an American economist who was the former chief of industrial output at the Federal Reserve Board and currently serves as a senior advisor and research director in economics on The Conference Board. She serves as a member of the executive committee for the National Bureau of Economic Research's (NBER) conference on research on income and wealth. She is a senior policy scholar at Georgetown University McDonough School of Business Centre for Business and Public Policy where she focuses on economics of growth and innovation as well as fiscal and monetary policies. In addition to these positions, Corrado is involved with the American Statistical Association as well as the Technical Advisory Committee of the Bureau of Labor Statistics. With the American Statistical Association Corrado serves as the chair-elect of Business and Economics.

References

  1. ↑ Domar aggregation at Online Glossary of Research Economics
  2. 1 2 3 4 Hulten, Charles R. 1978 Growth accounting with intermediate inputs. Review of Economic Studies , 45:3, 511-518
  3. 1 2 Simon Zheng. 2004. Estimating industry-level multifactor productivity for the market-sector industries in Australia: methods and experimental results. Working paper, Australian Bureau of Statistics, especially pp. 17-18
  4. ↑ Pirkko Aulin-Ahmavaara; Perttu Pakarinen. 2004. Industry Level and Aggregate Measures of Productivity Growth with Explicit Treatment of Taxes on Products. Statistics Finland.
  5. ↑ Domar, Evsey D. On the Measurement of Technological Change, 1961, The Economic Journal 71:284 (Dec., 1961), 709-729. (jstor)
  6. ↑ David Rezza Baqaee; Emmanuel Farhi. 2017. The Macroeconomic Impact of Microeconomic Shocks: Beyond Hulten’s Theorem Archived 2019-07-13 at the Wayback Machine . Working paper.
  7. ↑ Marshall Reinsdorf and Robert Yuskavage. 2010. Exact Industry Contributions to Labor Productivity Change, chapter 5, pp. 77-102 in W.E. Diewert, B.M. Balk, D. Fixler, K.J. Fox and A.O. Nakamura, 2010, Price and Productivity Measurement: Volume 6 -- Index Number Theory. Trafford Press.
  8. ↑ David Rezza Baqaee; Emmanuel Farhi. 2019. A short note on aggregating productivity. Online working paper.
  9. ↑ David Rezza Baqaee; Emmanuel Farhi. 2020. Productivity and misallocation in general equilibrium. Quarterly Journal of Economics . 105-163. doi:10.1093/qje/jz030
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.