Decompositions of Profitability Change using Cost Functions
AbstractProfitability 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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Bibliographic InfoPaper provided by School of Economics, University of Queensland, Australia in its series CEPA Working Papers Series with number WP092010.
Date of creation: Nov 2010
Date of revision:
Other versions of this item:
- Diewert, Erwin, 2010. "Decompositions of Profitability Change using Cost Functions," Economics working papers, Vancouver School of Economics erwin_diewert-2010-16, Vancouver School of Economics, revised 13 Jul 2010.
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
- H44 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Goods: Mixed Markets
- O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
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- 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.
- O'Donnell, Christopher J., 2009. "Measuring And Decomposing Agricultural Productivity And Profitability Change," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia, Australian Agricultural and Resource Economics Society 47625, Australian Agricultural and Resource Economics Society.
- 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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