Cost Structure and the Measurement of Economic Performance: Productivity Growth, Utilization, Cost Economies, and Related Performance Indicators

Abstract

Cost Structure and the Measurement of Economic Performance: Productivity Growth, Utilization, Cost Economies, and Related Performance Indicators By Catherine J. Morrison Paul. Norwell, MA: Kluwer Academic Publishers, 1999. Pp. xiv, 363. $129.95. This book, a revised version of Professor Paul's 1992 monograph, examines the measurement of productivity growth (as a measure of economic performance) from the production and cost function perspectives, and its decomposition into technical change and scale economies components. Productivity growth is measured as the growth rate in output (or outputs in the case of multiple outputs) minus a weighted average growth rate in inputs. Technical change occurs when a larger maximum quantity of output can be produced from a given quantity of inputs. From the cost side, technical change is measured by the rate of decline in total cost over time, accounting for other factors that could affect total cost. Scale economies refer to the proportional change in output due to a change in inputs by the same proportion, all other factors held constant. From the cost side, scale economies are typically measured using the total cost elasticity with respect to output. The total cost elasticity can be used to obtain an accurate measure of scale economies when there is one output, exogenous input prices, and all inputs change by the same proportion. The presence of fixed inputs, multiple outputs, endogenous input prices, and other factors affect the cost elasticity independent of output. The computed cost elasticity with respect to output would include these factors, and as a result does not provide an accurate measure of scale economies. Cost economies are referred to as the impact on total cost of a change in output, accounting and adjusting for fixed inputs, multiple outputs, endogenous input prices, and other factors that could affect total cost. The measure of cost economies is the total cost elasticity when these factors are taken into account. The measure of scale economies, computed using the total cost elasticity independent of other factors that can affect total cost, is a component of the measure of cost economies. The author analyzes how externalities, public goods, fixed inputs, regulation, and other factors can affect production cost, productivity growth and its components, and also how to adjust the measures of productivity growth and its components from the production and cost function perspectives to account for these various factors. A description of the chapters in the text is listed below. Chapters 1 and 2 provide a good and thorough discussion of productivity growth and technical change from the production and cost side perspectives, single-factor and multifactor measures of productivity growth, and the problems encountered with each type of measure. The author also includes a discussion on the determinants of technical change and testing whether technical change is input specific. Chapter 3 focuses on measuring the scale economy component of productivity growth when there are fixed or quasi-fixed inputs, which in turn brings about a discussion on capacity utilization. The author develops production and cost side (dual) measures of capacity utilization. The chapter also describes how to adjust measures of productivity growth when adjustment cost occurs when quasi-fixed inputs deviate from their steady-state values and capital characteristics such as quality, energy efficiency, and vintage are incorporated into the production and cost functions. Chapter 4 describes short-run and long-run measures of cost economies, primarily from the cost side, when there are multiple outputs, fixed inputs, and endogenous input prices. With multiple fixed inputs or endogenous input prices, a method is presented for incorporating these factors to measure a long-run total cost elasticity with respect to output. Chapter 5 analyzes how external factors, such as public capital expenditures, education, research and development, capital-specific technology, and human capital, can affect production cost and economic growth. …