Decomposing Value-Added Growth into Explanatory Factors

Abstract

A method for decomposing nominal value-added growth is presented, which identifies the contributions from efficiency change, growth of primary inputs, changes in output and input prices, technical progress, and returns to scale. In order to implement the decomposition, an estimate of the relevant cost-constrained value-added function for the two periods under consideration is required. This is taken to be the free disposal hull of past observations. Aggregation over sectors is also considered. The methodology is illustrated using US data for two sectors, which together constitute majority of the US business sector, over the years 1960–2014. The decompositions for each sector provide key insights into the drivers of economic growth. For the noncorporate nonfinancial sector, we find that the cost of recessions was particularly high.