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Decompositions of Profitability Change using Cost Functions

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  • W. Erwin Diewert

    ()
    (CEPA - School of Economics, The University of Queensland)

Abstract

Profitability at a period of time is defined as the value of outputs produced by a production unit divided by the corresponding cost. Using some earlier work by O?Donnell, the paper provides a decomposition of profitability growth over two periods into various explanatory factors. The explanatory factors are: the change in the production unit?s cost efficiency, an index of output price growth, returns to scale, technical progress and an index of input price growth. If output prices for the production unit are not available, the paper suggests that marginal costs could be used as prices to weight outputs in each period. Using marginal or average costs to weight outputs leads to a methodology for evaluating the productivity performance of nonmarket production units that is similar to the methodology suggested in the Atkinson report.

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File URL: http://www.uq.edu.au/economics/cepa/docs/WP/WP092010.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series CEPA Working Papers Series with number WP092010.

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Date of creation: Nov 2010
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Handle: RePEc:qld:uqcepa:55

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  1. O'Donnell, Christopher J., 2010. "Measuring and decomposing agricultural productivity and profitability change," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, Australian Agricultural and Resource Economics Society, vol. 54(4), December.
  2. C.J. O'Donnell, 2008. "An aggregate quantity-price framework for measuring and Decomposing productivity and profitability change," CEPA Working Papers Series, School of Economics, University of Queensland, Australia WP072008, School of Economics, University of Queensland, Australia.
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