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Aggregation in Production Functions: What Applied Economists should Know

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Author Info
Jesus Felipe
Franklin M. Fisher
Abstract

There is no subject so old that something new cannot be said about it. (Dostoevsky) Glendower: I can call spirits from the vasty deep Hotspur: Why, so can I, or so can any man;
But will they come when you do call for them? (Shakespeare, Henry IV, Part I, Act III, Scene I)
This paper surveys the theoretical literature on aggregation of production functions. The objective is to make neoclassical economists aware of the insurmountable aggregation problems and their implications. We refer to both the Cambridge capital controversies and the aggregation conditions. The most salient results are summarized, and the problems that economists should be aware of from incorrect aggregation are discussed. The most important conclusion is that the conditions under which a well-behaved aggregate production function can be derived from micro production functions are so stringent that it is difficult to believe that actual economies satisfy them. Therefore, aggregate production functions do not have a sound theoretical foundation. For practical purposes this means that while generating GDP, for example, as the sum of the components of aggregate demand (or through the production or income sides of the economy) is correct, thinking of GDP as GDP=F(K, L), where K and L are aggregates of capital and labor, respectively, and F(•) is a well-defined neoclassical function, is most likely incorrect. Likewise, thinking of aggregate investment as a well-defined addition to 'capital' in production is also a mistake. The paper evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument. Copyright Blackwell Publishing Ltd 2003.

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Article provided by Blackwell Publishing in its journal Metroeconomica.

Volume (Year): 54 (2003)
Issue (Month): 2-3 (05)
Pages: 208-262
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:bla:metroe:v:54:y:2003:i:2-3:p:208-262

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  3. Jesus Felipe & Rana Hasan & J. S. L. McCombie, 2004. "Correcting For Biases When Estimating Production Functions: An Illusion Of The Laws Of Algebra?," CAMA Working Papers 2004-13, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  8. Jesus Felipe & J. S. L. McCombie, 2004. "On The Rental Price Of Capital And The Profit Rate: The Perils And Pitfalls Of Total Factor Productivity Growth," CAMA Working Papers 2004-10, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  9. Jesus Felipe, 2005. "Aggregate Investment In The People'S Republic Of China: A Comment," CAMA Working Papers 2005-17, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  10. Hoover, Kevin D., 2004. "A NeoWicksellian in a New Classical World: The Methodology of Michael Woodford's Interest and Prices," Working Papers 06-5, University of California at Davis, Department of Economics. [Downloadable!]
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  11. Jesus Felipe & F. Gerard Adams, 2005. ""A Theory of Production" The Estimation of the Cobb-Douglas Function: A Retrospective View," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 427-445, Summer. [Downloadable!]
  12. Felipe, J., 2003. "Sustainable development: a comment," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 21, pages 575-581, December. [Downloadable!] (restricted)
  13. Aamer Abu-Qarn & Suleiman Abu-Bader, 2006. "Getting Income Shares Right: A Panel Data Investigation for OECD Countries," Working Papers 228, Ben-Gurion University of the Negev, Department of Economics. [Downloadable!]
  14. Codrina Rada & Lance Taylor, 2004. "Empty Sources of Growth Accounting, and Empirical Replacements à la Kaldor with Some Beef," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 5(3), pages 45-74. [Downloadable!]
  15. Franklin Fisher, 2005. "Aggregate Production Functions: A Pervasive, but Unpersuasive, Fairytale," Eastern Economic Journal, Eastern Economic Association, vol. 31(3), pages 489-491, Summer. [Downloadable!]
  16. Biørn, Erik & Skjerpen, Terje & Wangen, Knut Reidar, 2004. "Can Random Coefficient Cobb-Douglas Production Functions Be Aggregated to Similar Macro Functions?," Memorandum 22/2004, Oslo University, Department of Economics. [Downloadable!]
  17. Codrina Rada, 2007. "A growth model for a two-sector economy with endogenous productivity," Working Papers 44, United Nations, Department of Economics and Social Affairs. [Downloadable!]
  18. Hölzl,Werner & Reinstaller,Andreas, 2004. "The Impact of technology and demand shocks on structural dynamics: evidence from Austrian manufacturing," Research Memoranda 015, Maastricht : MERIT, Maastricht Economic Research Institute on Innovation and Technology. [Downloadable!]
  19. Nelson H. Barbosa Filho, 2004. "A Simple Model Of Demand-Led Growth And Income Distribution," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 038, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
  20. Gábor Kátay & Zoltán Wolf, 2008. "Driving Factors of Growth in Hungary - a Decomposition Exercise," MNB Working Papers 2008/6, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
  21. Werner Hölzl & Andreas Reinstaller, 2004. "Sectoral and aggregate technology shocks: Is there a relationship?," Working Papers geewp38, Vienna University of Economics and B.A. Research Group: Growth and Employment in Europe: Sustainability and Competitiveness. [Downloadable!]
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