Solow Residual Research Articles

Price-Cost Margins, Fixed Costs and Excess Profits

Abstract This paper provides a new method to estimate price-cost margins in the presence of fixed costs of production. By exploiting properties of the primal and dual sales-based and cost-based Solow residuals, we are able to simultaneously estimate price-cost margins and the share of fixed costs in total costs for each input. Ignoring fixed costs in production underestimates price-cost margins and overestimates excess profit shares. Using a thirty-year panel of Belgian firms, we estimate price-cost margins, as a fraction of sales, of 25.4% on average, which can be decomposed between fixed costs of 22.9% and excess profits of 2.5%. Belgian price-cost margins have declined (−5.9%) in the past three decades due to a combination of falling fixed costs (−4.0%) and decreasing excess profits (−1.9%), suggesting that output markets have become even more competitive over time. While large firms have higher profit shares than small firms, they have lower fixed cost shares as well as lower price-cost margins.

On some relations between a continuous time Luenberger productivity indicator and the Solow model

ABSTRACTWe introduce well‐known microeconomics productivity measures in Solow models in discrete time or continuous time by adopting a Luenberger‐type approach. In each framework, we derive the productivity indicators and the dynamical paths. First, we show that the expression of the productivity indicators are similar to the well‐known Solow residuals, allowing us to make an analogy between a firm's behavior in a microeconomic setting and a country's behavior in a macroeconomic setting. Second, we demonstrate that the properties of the paths are similar in both frameworks.

THE ROLE OF TECHNOLOGICAL PROGRESS IN AGRICULTURAL OUTPUT GROWTH IN THE NMS UPON EUROPEAN UNION ACCESSION

It is very important to increase input productivity in agriculture. This not only enables feeding the growing population, but also reducing agricultural pressure on the environment. The aim of the study is to determine the importance of TFP in comparison to the significance of production inputs in the growth of agricultural output in new EU member states. The analysis covered 2000-2016. Data available from the USDA on agriculture of the studied countries was used. The method of Solow residuals was used in the study. It was found that, in the studied countries, agricultural output decreased after political transformation and, since 2004, a further decrease of agricultural production was observed in five out of nine countries. Only in the three Baltic states and Poland was there an increase in production. In all countries, except Poland, a decrease in production intensity was observed. The area of agricultural land in all countries except the Baltic states decreased similarly. In the analyzed period, the highest increase in factor productivity was achieved in Lithuania (72%), Estonia (57%) and Latvia (51%), while the lowest in Hungary (7%) and Poland (21%). In each of the analyzed countries, the increase in TFP resulted in either an increase in agricultural output or the decrease in agricultural output was smaller than the decrease in the amount of inputs used. Technological change plays a dominant role in achieving an increase in agricultural production and an increase in the productivity of other inputs.

A new approach to inter‐regional network externalities in Japan

AbstractThis study evaluates the regional agglomeration and the inter‐regional network economies in Japan based on cost‐based Solow residuals, overcoming the issues associated with the conventional analytical approaches. Furthermore, this study performs a simulation analysis of the economic impacts of the Linear Chuo Shinkansen (magnetic levitation train) to investigate the role of high‐quality transportation infrastructure in regional sustainability. The results reveal that the improvement of inter‐regional networks increases regional productivity. Furthermore, the results reveal that the economic benefits of inter‐regional networks extend beyond railroad lines. These results suggest that inter‐regional networks via high‐quality transportation infrastructure enhance regional economic performance.

Structural change in the trend and cycle in Korea

We develop a new identification approach based on the regression of consumption on output to identify a structural break in business cycles. Using this method, we find that a structural change in the trend and cycle in Korea occurred in 1993. To explain these, we estimate the parameters of the productivity process in Korea, using data on Solow residuals. Our estimates show that the relative importance of trend growth shocks in the post-break period increased by a factor of 2.56 compared to that in the pre-break period.

A Structural Change in the Trend and Cycle in Korea

On the basis of regression of consumption on output, we develop a new approach to identify a structural break in business cycles. Using this approach, we find that a structural change in the trend and cycle in Korea occurred in 1993 and that the business cycles in Korea started to show the regularities of emerging market business cycles beginning in 1993. To explain these, we estimate the parameters of the productivity process in Korea, using data on Solow residuals. Our estimates show that the relative importance of trend growth shocks in the post-break period increased by a factor of 2.56 from that in the pre-break period.

Endogenous second moments: A unified approach to fluctuations in risk, dispersion, and uncertainty

We explore a mechanism by which second moments—such as cross-sectional dispersions, risk, volatility, or uncertainty—naturally and endogenously fluctuate over time as nonlinear transformations of fundamentals. Specifically, we provide theoretical results that characterize second moments of transformed random variables when the underlying fundamentals are subject to distributional shifts that affect their means, but not their variances. We illustrate the usefulness of our results with a series of applications. Our main application concerns the cross-sectional dispersions of output, employment, and Solow residuals, which we show to become countercyclical if employment and capital are gross complements. The mechanism can account for a significant share of the empirical cyclicality patterns, without exogenous shocks to volatilities. In additional applications we use our theory to study endogenous fluctuations in the dispersion of MRPKs, in risk in security pricing, and in uncertainty in Bayesian inference problems.

La productivité globale des facteurs : comment évaluer plus précisément « notre ignorance » ?

Cet article traite du thème de la comptabilité de la croissance économique appliquée à la France. Exercice rétrospectif (pouvant revêtir une dimension prospective), celui-ci cherche à savoir quels auront été les poids des déterminants de la croissance. Dans sa version usuelle, ce cadre a de nombreux mérites mais ne permet pas toutefois d’aspirer à une détermination quantitative exhaustive des sources de la croissance. Cela est d’autant plus vrai que des hypothèses pourtant empiriquement plausibles que nous développons successivement puis cumulativement n’y sont pas considérées. Le poids de ces sources se retrouve alors fatalement dans le « résidu de Solow », mesurant « notre ignorance », mésestimant ainsi les véritables leviers de croissance. Cette contribution d’ordre économique, méthodologique et statistique portera sur l’année 2015 à titre illustratif. Le cadre comptable usuel ainsi complété, évalué et réplicable spatio-temporellement, y compris prospectivement, fournit un modèle d’analyse et de comptabilité raffinée de la croissance économique révélant l’obtention de contributions factorielles et de résidus de croissance différents de ceux que la pratique courante de la comptabilité de la croissance aurait fournis. Classification JEL : D24, O5, O40, O47, O49.

ASYMMETRIES IN BUSINESS CYCLES AND THE ROLE OF OIL PRICES

We estimate asymmetries in innovations to Solow residuals for 11 Organization for Economic Co-operation and Development (OECD) countries using stochastic frontier analysis. Likelihood ratio statistics and variance ratios imply that all countries with net energy imports have significant negative asymmetries, whereas other countries do not. We construct a simple theoretical model in which the measured Solow residual combines effects from technology, factor utilization, and the terms of trade. For oil importers, the model implies an asymmetric response of measured total factor productivity to oil price increases and decreases. When we condition Solow residuals separately on positive and negative oil price changes to allow asymmetric responses, evidence for remaining negative asymmetric innovations to the Solow residuals vanishes for all countries except Switzerland. Switzerland's relatively dominant financial sector suggests that their asymmetries could be due to a financial crisis, a hypothesis that we test and fail to reject.

Monopolistic markups in the Polish food sector

Research background: Research background: Agro-food sectors are commonly considered as highly regulated, traditional and of strategic importance, mainly due to the food security issues. Changes in the related market structures are subject of constant interest because of their importance for competition and economic welfare of food producers and consumers. In Poland, a rising concentration among various branches of the food industry can be observed. Unfortunately, there is a lack of studies regarding the level of actually exerted market power.Purpose of the article: The main objective of the article was to depict the changes of the market power execution in the Polish food sector and its branches in the period 2002?2013.Methods: As a measure of market power, markups of price above the marginal cost were applied and for their estimation two methods were used, namely the Roeger method involving primal and dual Solow residuals and the method based on the marginal cost of labor. Yearly data from F-01 financial statements regarding 32 food sector branches and various accounting categories were used in the calculations.Findings and Value added: It was found that in the analyzed period the markup over marginal cost on average amounted to 9.75%, and it was increasing over time. The labor input category seemed to be not sufficient for the markup calculation. The evolution of the monopolistic power in the Polish food sector appears to be associated not only with the business cycle, but also with the sector developments accelerated by the accession to the EU. Moreover, the differences in results for the branches indicate a considerable heterogeneity in the Polish food industry companies pricing practices. The research constitutes the first trial of the measurement of both the Roeger markups in the Polish food sector branches and the labor markups changes in the Polish food sector.

Solow residuals without capital stocks

We use synthetic data generated by a prototypical stochastic growth model to assess the accuracy of the Solow residual (Solow, 1957) as a measure of total factor productivity (TFP) growth when the capital stock in use is measured with error. We propose two alternative measurements based on current investment expenditures: one eliminates the capital stock by direct substitution, while the other employs generalized differences of detrended data and the Malmquist index. In short samples, these measures can exhibit consistently lower root mean squared errors than the Solow–Törnqvist counterpart. Capital measurement problems are particularly severe for economies still far from their steady state. This drawback of the Solow residual is thus most acute in applications in which its accuracy is most highly valued. As an application, we compute and compare TFP growth measures for developing countries in the Heston–Summers dataset.

ESTIMATING PRODUCTIVITY GROWTH IN THE KOREAN ECONOMY WITHOUT RESTRICTIVE ASSUMPTIONS

This study eliminates the effects of markup, returns to scale, and capital utilization from the Solow residual (SR) for Korea to derive an alternative measure for productivity. Empirical results show that markup generates significant bias in the SR, and that the alternative productivity measure is greater than the residual. Furthermore, money supply Granger‐causes the SR but does not Granger‐cause the alternative measure, suggesting that the new productivity measure is consistent with the neutrality of money. The results contradict the presumption that the SR with variable capital utilization represents true technology shocks because it is orthogonal to demand shocks.(JEL C32, E32, O47)

An Empirical Analysis of the Productivity Shock Correlations between US and Rest of the World—Trends, Factors and the Role of Recessions

This study uses quarterly data for a group of advanced and emerging market economies to study the role of TFP correlations between the US and the Rest of the World. Following Bosworth and Collins [1], Solow residuals are constructed to proxy for TFP shocks. Then, bilateral correlations with the US are calculated. Recent theoretical studies have emphasized the importance of TFP shock correlations for portfolio choice. The data suggests that the correlations are indeed very volatile and drop sharply during recessions. Arellano-Bond [2] regressions suggest that US Recessions are associated with a drop in cross-country productivity correlations in the medium and long term intervals.

Understanding Solow Residuals in Latin America

Despite some improvements in recent years, long-term economic growth in Latin America and the Caribbean (LAC) has been rather disappointing over the past decades. Since 1960, gaps in the GDP per capita of LAC countries with respect to not only the United States but also their peers (twin economies) have widened steadily (see table 1). While the typical Latin American country1 was around 4.4 times poorer than the United States in 1960, as of 2008 it was 5.5 times poorer. The comparison with twin economies- countries that in 1960 had GDP per capita comparable to that in Latin America2-is even more remarkable. The average LAC economy was just 20 percent poorer than its typical twin economy in 1960. In 2008, GDP per capita in Latin America was less than half that in the twin economies.This persistent decline in relative GDP per capita has been common to all countries in the region, with some exceptions. Of the nineteen LAC econo- mies in my sample, five managed to grow faster than the United States during the 1960-2008 period: Brazil, Chile, Colombia, the Dominican Republic, and Panama. However, progress has been quantitatively modest. For example, if benchmarked to twin economies, only the Dominican Republic and Panama managed to grow faster over the same period. Furthermore, in several cases (for example, Brazil) progress was made mainly during the 1960s and 1970s, with growth being subpar from the debt crisis in the early 1980s onward. While the 2000s have been good years in terms of relative growth performance for the region, it will still take around 27 years to cut by 50 percent the GDP per capita gap with respect to the United States if the growth differential during 2000-08 of around 1.5 percent per year is to be maintained; with respect to the twin economies, it will take around 108 years. Therefore, low potential growth continues to be significant challenge for the region.This paper contributes to the understanding of what drives this poor per- formance by using new databases and analytical tools to explore the relative importance of productivity and factor accumulation across LAC countries. With regard to analytical tools, the paper provides new evidence from three viewpoints. First, I perform careful analysis of different ways of decom- posing GDP per capita levels into physical capital, human capital, and residual-the residual, often interpreted as measure of total fac- tor productivity (TFP), representing aggregate economic efficiency, but also often viewed as a measure of our ignorance-under different assumptions regarding the production function and measurement. Second, I present non- parametric estimations of efficiency based on data envelope analysis that does not rely on the traditionally used Cobb-Douglas production function; instead, it recognizes that the relevant production possibilities frontier may be function of factor endowments and thus differ across countries. With regard to new data sets, this paper uses three newly available sources. First, in contrast to previous studies focusing on Latin America, it uses the new version of the Barro and Lee (2010) data set on educational attainment, which addresses several concerns on data quality that arose over the previous ver- sion (see Cohen and Soto 2007 as well as De la Fuente and Domenech 2006). Second, I also use the latest version of the Penn World Tables (version 7.0), extending the analysis until 2008; doing so allows me to cover the 2000s, decade that has been quite successful for the region in terms of economic growth compared with its past. Third, I use the PISA 2009 test scores from the Organization for Economic Cooperation and Development (OECD) to analyze the importance of cognitive skills and adjust human capital indicators for differences in quality.The paper focuses on the decomposition of GDP per worker into physical capital, human capital, and the Solow residual through the use of alternative methods, as policy recommendations might differ substantially according to the source of income disparities, in particular if policymakers have to estab- lish priorities and have limited political capital to implement reforms. …

Understanding Solow Residuals in Latin America

Understanding Solow Residuals in Latin America Christian Daude (bio) Despite some improvements in recent years, long-term economic growth in Latin America and the Caribbean (LAC) has been rather disappointing over the past decades. Since 1960, gaps in the GDP per capita of LAC countries with respect to not only the United States but also their peers (“twin economies”) have widened steadily (see table 1). While the typical Latin American country1 was around 4.4 times poorer than the United States in 1960, as of 2008 it was 5.5 times poorer. The comparison with twin economies—countries that in 1960 had a GDP per capita comparable to that in Latin America2—is even more remarkable. The average LAC economy was just 20 percent poorer than its typical twin economy in 1960. In 2008, GDP per capita in Latin America was less than half that in the twin economies. [End Page 109] Click for larger view View full resolution Table 1. GDP per Capita in Latin America Relative to Benchmarksa This persistent decline in relative GDP per capita has been common to all countries in the region, with some exceptions. Of the nineteen LAC economies in my sample, five managed to grow faster than the United States during the 1960–2008 period: Brazil, Chile, Colombia, the Dominican Republic, and Panama. However, progress has been quantitatively modest. For example, if benchmarked to twin economies, only the Dominican Republic and Panama managed to grow faster over the same period. Furthermore, in several cases (for example, Brazil) progress was made mainly during the 1960s and 1970s, with growth being subpar from the debt crisis in the early 1980s onward. While the 2000s have been good years in terms of relative growth performance for the region, it will still take around 27 years to cut by 50 percent the GDP per capita gap with respect to the United States if the growth differential during 2000–08 of around 1.5 percent per year is to be maintained; with respect to the twin economies, it will take around 108 years. Therefore, low potential growth continues to be a significant challenge for the region. [End Page 110] This paper contributes to the understanding of what drives this poor performance by using new databases and analytical tools to explore the relative importance of productivity and factor accumulation across LAC countries. With regard to analytical tools, the paper provides new evidence from three viewpoints. First, I perform a careful analysis of different ways of decomposing GDP per capita levels into physical capital, human capital, and a residual—the “Solow residual,” often interpreted as a measure of total factor productivity (TFP), representing aggregate economic efficiency, but also often viewed as “a measure of our ignorance”—under different assumptions regarding the production function and measurement. Second, I present non-parametric estimations of efficiency based on a data envelope analysis that does not rely on the traditionally used Cobb-Douglas production function; instead, it recognizes that the relevant production possibilities frontier may be a function of factor endowments and thus differ across countries. With regard to new data sets, this paper uses three newly available sources. First, in contrast to previous studies focusing on Latin America, it uses the new version of the Barro and Lee (2010) data set on educational attainment, which addresses several concerns on data quality that arose over the previous version (see Cohen and Soto 2007 as well as De la Fuente and Domenech 2006). Second, I also use the latest version of the Penn World Tables (version 7.0), extending the analysis until 2008; doing so allows me to cover the 2000s, a decade that has been quite successful for the region in terms of economic growth compared with its past. Third, I use the PISA 2009 test scores from the Organization for Economic Cooperation and Development (OECD) to analyze the importance of cognitive skills and adjust human capital indicators for differences in quality. The paper focuses on the decomposition of GDP per worker into physical capital, human capital, and the Solow residual through the use of alternative methods, as policy recommendations might differ substantially according to the source of income disparities, in...

A Case Study: Impact of International Liberalization on the Indian Economy

This paper, using the Solow growth model looks at the impact of liberalization on India's economic growth. Additionally, using empirical data, it analyzes the patterns, processes, and characteristics of India's economic growth. The Solow model explains the long run economic growth via the change in the Solow residuals. This paper defines the Solow residual as International trade. This paper will show that International trade and fewer regulations on exports and imports have ignited high economic growth in India. After the late 1980s, India saw an immense increase in international trade. Led by low tariff rates, India saw a hike in exports and imports and more importantly, foreign investments. With the backing of facts and figures, this paper will show that India has actually benefited in terms of economic growth from international trade. With liberalization, India has not only had success in the macro level, but it has also impacted people in terms of per capita income in the micro level. This paper is broken down into 4 sections. The first section gives an introduction to India and its relevance to the Solow model. The second section explores the theoretical framework of the Solow model. The third section uses the empirical data to examine the impact of liberalization on India (pre and post reformation). Finally, the fourth section is the analysis and conclusion section which compares India to other South Asian counties and gives policy recommendation.

The Contribution of Chinese FDI to Africa's Pre Crisis Growth Surge

In the 3 years before the 2008 Financial Crisis, GDP growth in Sub-Saharan Africa (averaged over individual economies) was around 6%, or 2 percentage points above mean growth rates for the preceding 10 years. This period also coincided with significant Chinese FDI flows into these countries, accounting for up to 10% of total inward FDI flows for certain countries in these years. We use growth accounting methods to assess what portion of this elevated growth can be attributed to Chinese inward FDI. We follow Solow (1957), Dennison (1962), and others and use data for individual economies between 1990 and 2008 to calculate Solow residuals for these years for individual economies. We use capital stock data, workforce, and factor share data by country. Capital stock data is unavailable directly and so we use perpetual inventory methods to construct the data. Factor shares come from UN National Accounts data. We then run counterfactual growth accounting experiments for thirteen Sub-Saharan African countries excluding Chinese FDI inflows for 2005-2007 and also 2003-2009. Our individual results vary by year and country, but there are several year/country combinations where Chinese FDI contributed to an additional one half of a percentage point or above to GDP growth. These results suggest that a significant, even if in some cases small, portion of the elevated growth in Sub-Saharan Africa in the three years before the Financial Crisis and also in the two years afterwards (2008-2009) can be attributed to Chinese inward investment.

RESÍDUOS DE SOLOW INDUSTRIAIS: UM ESTUDO EMPÍRICO PARA O BRASIL

Neste artigo, estudamos as propriedades cíclicas de taxas de variação de medidas de produtividade total dos fatores (“resíduos de Solow”) para a indústria brasileira. Para tanto, procuramos verificar se diferenças na metodologia de construção das medidas de produtividade consideradas afetam suas propriedades estatísticas. Os resultados obtidos demonstram que tais propriedades são sensíveis à metodologia empregada. Em particular, no caso da amostra analisada, obtemos três resultados básicos: (i) medidas de produtividade corrigidas são menos correlacionadas com medidas de produção industrial quando comparadas com medidas de produtividade não corrigidas; (ii) medidas onde a correção é feita a partir do uso da variável “consumo industrial de energia elétrica” apresentam uma volatilidade inferior à volatilidade da produção industrial, enquanto que medidas onde a correção é feita a partir do uso da variável “utilização da capacidade instalada” apresentam uma volatilidade superior; (iii) apenas medidas onde a correção é feita a partir do uso de taxas variáveis de utilização da capacidade instalada obedecem à propriedade de invariância de Hall-Evans, podendo ser caracterizadas como exógenas. Esses resultados demonstram a importância da metodologia empregada na construção de medidas de produtividade bem como a importância de taxas variáveis de utilização da capacidade instalada no caso de horizontes correspondentes a ciclos de negócios.

Industrial concentration, price-cost margins, and innovation

This paper explores a panel data set matching establishment-based production statistics from Japan's Census of Manufacturers with wholesale price indices from the Bank of Japan, and Herfindahl indices from the Japan Fair Trade Commission. The data include annual observations over the period 1961–1990, for 74 industries at the four-digit s.i.c. level. I estimate Cobb-Douglas production functions and Solow residuals for each industry and then use these estimates to further analyze the determinates of industrial concentration and innovation. The industries having great capital intensity and small employment of labor tend to be more concentrated. Cross-section estimates reveal a U-shaped mapping from concentration to innovation.

The Solow residual, Domar aggregation, and inefficiency: a synthesis of TFP measures

We consolidate and interrelate the four main approaches to the measurement and decomposition of total factor productivity growth, namely Solow’s residual analysis, the index number approach, Data Envelopment Analysis, and Domar aggregation. Two new results link the general technology TFP growth measure to the industry Solow residuals and inefficiency.