Growth Accounting Equations

Relating the total output produced to inputs, this method measures the relative differentials in contribution to growth by the different factors of production. The contribution of various factors of economic growth is assessed and measured in  this approach. Economic growth is defined in terms of national income. An account of national income is drawn in such a way as to balance it with the contributions of economic growth.

National income is normally measured in two ways:

(i) The total costs of all the factors employed to produce the given output,

(ii) The market prices of the commodities and services that are produced in a given year.

It is possible to consider an extension of the growth accounting technique with more variables considered. Such works come under what is called as ‘econometric modelling’. A ‘model’ is a simplified representation of reality that is used to explain or predict the interaction between (and among) the variables. Explanation provided can be through diagrams or equations while interpretations can be made in plain language.