Decompositions of Profitability Change using Cost Functions
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 Oâ€™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 unitâ€™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.
|Date of creation:||12 May 2010|
|Date of revision:||13 Jul 2010|
|Contact details of provider:|| Web page: http://www.economics.ubc.ca/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- McFadden, Daniel, 1978. "Cost, Revenue, and Profit Functions," Histoy of Economic Thought Chapters, in: Fuss, Melvyn & McFadden, Daniel (ed.), Production Economics: A Dual Approach to Theory and Applications, volume 1, chapter 1 McMaster University Archive for the History of Economic Thought.
- Varian, Hal R, 1984. "The Nonparametric Approach to Production Analysis," Econometrica, Econometric Society, vol. 52(3), pages 579-97, May.
- W. Diewert, 2011.
"Measuring productivity in the public sector: some conceptual problems,"
Journal of Productivity Analysis,
Springer, vol. 36(2), pages 177-191, October.
- Diewert, Erwin, 2010. "Measuring Productivity in the Public Sector: Some Conceptual Problems," Economics working papers erwin_diewert-2010-6, Vancouver School of Economics, revised 13 Jul 2010.
- Samuelson, Paul A & Swamy, S, 1974. "Invariant Economic Index Numbers and Canonical Duality: Survey and Synthesis," American Economic Review, American Economic Association, vol. 64(4), pages 566-93, September.
- John C. Panzar & Robert D. Willig, 1977. "Economies of Scale in Multi-Output Production," The Quarterly Journal of Economics, Oxford University Press, vol. 91(3), pages 481-493.
- Christopher J. O'Donnell, 2010.
"Measuring and decomposing agricultural productivity and profitability change ,"
Australian Journal of Agricultural and Resource Economics,
Australian Agricultural and Resource Economics Society, vol. 54(4), pages 527-560, October.
- 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, 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 47625, Australian Agricultural and Resource Economics Society.
- Diewert, W.E., 1993. "Duality approaches to microeconomic theory," Handbook of Mathematical Economics, in: K. J. Arrow & M.D. Intriligator (ed.), Handbook of Mathematical Economics, edition 4, volume 2, chapter 12, pages 535-599 Elsevier.
- W. Diewert & Alice Nakamura, 2003. "Index Number Concepts, Measures and Decompositions of Productivity Growth," Journal of Productivity Analysis, Springer, vol. 19(2), pages 127-159, April.
- W. Erwin Diewert & Catherine J. Morrison, 1985.
"Adjusting Output and Productivity Indexes for Changes in the Terms of Trade,"
NBER Working Papers
1564, National Bureau of Economic Research, Inc.
- Diewart, W Erwin & Morrison, Catherine J, 1986. "Adjusting Output and Productivity Indexes for Changes in the Terms of Trade," Economic Journal, Royal Economic Society, vol. 96(383), pages 659-79, September.
- Diewert, W. Erwin & Fox, Kevin J., 2008.
"On the estimation of returns to scale, technical progress and monopolistic markups,"
Journal of Econometrics,
Elsevier, vol. 145(1-2), pages 174-193, July.
- Kevin J. Fox & W. Erwin Diewert, 2004. "On the Estimation of Returns to Scale, Technical Progress and Monopolistic Markups," Econometric Society 2004 Australasian Meetings 310, Econometric Society.
- W. Erwin Diewert, 1980. "Aggregation Problems in the Measurement of Capital," NBER Chapters, in: The Measurement of Capital, pages 433-538 National Bureau of Economic Research, Inc.
- W. Diewert & Kevin Fox, 2010. "Malmquist and Törnqvist productivity indexes: returns to scale and technical progress with imperfect competition," Journal of Economics, Springer, vol. 101(1), pages 73-95, September.
- Bert Balk, 2003. "The Residual: On Monitoring and Benchmarking Firms, Industries, and Economies with Respect to Productivity," Journal of Productivity Analysis, Springer, vol. 20(1), pages 5-47, July.
- Afriat, Sidney N, 1972. "Efficiency Estimation of Production Function," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(3), pages 568-98, October.
- C.J. O'Donnell, 2008. "An aggregate quantity-price framework for measuring and Decomposing productivity and profitability change," CEPA Working Papers Series WP072008, School of Economics, University of Queensland, Australia.
- Førsund, Finn R. & Hjalmarsson, Lennart, 1983.
"Technical Progress and Structural Change in the Swedish Cement Industry 1955 - 1979,"
Working Paper Series
98, Research Institute of Industrial Economics.
- Forsund, Finn R & Hjalmarsson, Lennart, 1983. "Technical Progress and Structural Change in the Swedish Cement Industry 1955-1979," Econometrica, Econometric Society, vol. 51(5), pages 1449-67, September.
- Bert Balk, 2001. "Scale Efficiency and Productivity Change," Journal of Productivity Analysis, Springer, vol. 15(3), pages 159-183, May.
- Kevin Fox & Ulrich Kohli, 1998.
"GDP growth, terms-of-trade effects, and total factor productivity,"
The Journal of International Trade & Economic Development,
Taylor & Francis Journals, vol. 7(1), pages 87-110.
- Kholi, U. & Fox, K., 1996. "GDP Growth, Terms-of-Trade Effects and Total Factor Productivity," Papers 96/28, New South Wales - School of Economics.
- Hanoch, Giora & Rothschild, Michael, 1972. "Testing the Assumptions of Production Theory: A Nonparametric Approach," Journal of Political Economy, University of Chicago Press, vol. 80(2), pages 256-75, March-Apr.
- Robert B. Archibald, 1977. "On the Theory of Industrial Price Measurement Output Price Indexes," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 57-72 National Bureau of Economic Research, Inc.
- Fare, Rolf & Knox Lovell, C. A., 1978. "Measuring the technical efficiency of production," Journal of Economic Theory, Elsevier, vol. 19(1), pages 150-162, October.
When requesting a correction, please mention this item's handle: RePEc:ubc:bricol:erwin_diewert-2010-16. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maureen Chin)
If references are entirely missing, you can add them using this form.