Solow residual Source: econterms
A measure of the change in total factor productivity in a Solow growth model. This is a way of doing growth accounting empirically either for an industry or more commonly for a macroeconomy. Formally, roughly following Hornstein and Krusell (1996): - (1-a)(log lt+1) - (1-a)(log lt) The equation may look daunting but the derivations are not difficult and students are sometimes asked to practice them until they are routine. Hulten (2000) says about the residual that: -- it measures shifts in the implicit aggregate production function. -- it is a nonparametric index number which measures that shift in a computation that uses prices to measure marginal products. -- the factors causing the measured shift include technical innovation, organizational and institutional changes, fluctuations in demand, changes in factor shares (where factors are capital, labor, and sometimes measures of energy use, materials use, and purchased services use), and measurement errors. From an informal discussion by this editor, it looks like the residual contains these empirical factors, among others: public goods like highways; externalities from networks like the Internet; some externalities and losses of capital services from disasters like September 11; theft; shirking; and technical / technological change. |