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On the Rental Price of Capital and the Profit Rate: The Perils and Pitfalls of Total Factor Productivity Growth

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  • Jesus Felipe
  • J. S. L. Mccombie

Abstract

This paper considers the implications of the conceptual difference between the rental price of capital, embedded in the neoclassical cost identity (output equals the cost of labor plus the cost of capital), which is used in growth accounting studies; and the accounting profit rate, which can be derived from the National Income and Product Accounts (NIPA). The neoclassical identity is a 'virtual' identity in that it depends on a series of assumptions (constant returns to scale and perfectly competitive factor markets). The income side of the NIPA also provides an accounting identity for output as the sum of the wage bill plus the gross operating surplus. This identity, however, is a 'real' one, in the sense that it does not depend on any assumption and thus it always holds. It is shown that because the neoclassical cost identity and the income accounting identity according to the NIPA may be expressed as formally equivalent expressions, estimations of aggregate production functions and growth accounting studies are tautologies. Likewise, the test of the hypothesis of competitive markets using Hall's (1988) framework gives rise to a null hypothesis that cannot be rejected statistically. Finally, it is argued that the NIPA identity does hold in constant prices, pace Denison (1972a, 1972b).

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File URL: http://www.tandfonline.com/doi/abs/10.1080/09538250701453014
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Review of Political Economy.

Volume (Year): 19 (2007)
Issue (Month): 3 ()
Pages: 317-345

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Handle: RePEc:taf:revpoe:v:19:y:2007:i:3:p:317-345

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  1. John Fernald & Brent Neiman, 2010. "Growth Accounting with Misallocation: Or, Doing Less with More in Singapore," NBER Working Papers 16043, National Bureau of Economic Research, Inc.
  2. Simon, Herbert A., 1978. "Rational Decision-Making in Business Organizations," Nobel Prize in Economics documents 1978-1, Nobel Prize Committee.
  3. Shaikh, Anwar, 1974. "Laws of Production and Laws of Algebra: The Humbug Production Function," The Review of Economics and Statistics, MIT Press, vol. 56(1), pages 115-20, February.
  4. Samuelson, Paul A, 1979. "Paul Douglas's Measurement of Production Functions and Marginal Productivities," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 923-39, October.
  5. Nadiri, M Ishaq, 1970. "Some Approaches to the Theory and Measurement of Total Factor Productivity: A Survey," Journal of Economic Literature, American Economic Association, vol. 8(4), pages 1137-77, December.
  6. Labini, Paolo Sylos, 1995. "Why the interpretation of the Cobb-Douglas production function must be radically changed," Structural Change and Economic Dynamics, Elsevier, vol. 6(4), pages 485-504, December.
  7. Felipe, Jesus & McCombie, J. S. L., 1999. "Wan's "New Approach" to Technical Change: A Comment," Journal of Comparative Economics, Elsevier, vol. 27(2), pages 355-363, June.
  8. Jesus Felipe & Carsten Holz, 2001. "Why do Aggregate Production Functions Work? Fisher's simulations, Shaikh's identity and some new results," International Review of Applied Economics, Taylor & Francis Journals, vol. 15(3), pages 261-285.
  9. Nelson, Richard R, 1981. "Research on Productivity Growth and Productivity Differences: Dead Ends and New Departures," Journal of Economic Literature, American Economic Association, vol. 19(3), pages 1029-64, September.
  10. 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.
  11. Chang-Tai Hsieh, 2002. "What Explains the Industrial Revolution in East Asia? Evidence From the Factor Markets," American Economic Review, American Economic Association, vol. 92(3), pages 502-526, June.
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