The Problems with Growth Accounting:Unrealistic Assumptions and Biased Results

The traditional methodology of growth accounting is dependent on the unrealistic assumptions of perfect competition and simultaneous expenditures and revenues for labor and intermediaries. When these assumptions do not hold, the economic growth attributed to labor and intermediaries is underestimated, the economic growth attributed to physical capital is overestimated and the economic growth attributed to productivity can be biased in both directions. The empirical relevance of this issue is assessed with a regression analysis, using panel data on private industries from the United States. The results indicate that the economic growth due to intermediaries is indeed significantly underestimated and growth due to physical capital significantly overestimated. The economic growth attributed to labor is substantially overestimated, but not significantly so, and whether growth due to productivity is significantly biased depends on the circumstances.