Decomposing growth in revenues and costs into price, quantity and total factor productivity contributions

• Published in: Applied economics Vol. 41; no. 23; pp. 2943 - 2953
• Main Authors: Dumagan, J.C, Ball, V.E
• Format: Journal Article
• Language: English
• Published: London Routledge 01.10.2009; Taylor and Francis Journals; Taylor & Francis Ltd
• Series: Applied Economics
• Subjects: agricultural economics; Agriculture; cost analysis; Decomposition; econometric models; economic development; Economic growth; Economic policy; Growth rates; income; Indexes; prices; Productivity; Productivity growth; Revenue; Studies; Total factor productivity; United States; United States > US
• ISSN: 0003-6846; 1466-4283
• DOI: 10.1080/00036840701367549

This article employs the superlative Fisher and Trnqvist indexes for exact decomposition of growth in nominal revenues and costs. The findings confirm the well-known result that these indexes very closely approximate each other, implying that the mathematically simpler and computationally easier Trnqvist is the more practicable index. Moreover, this article's nominal growth decomposition yields all the results from the more common real growth decomposition and is also more informative for policy purposes. Application to the US agricultural sector during 1948-2001 shows that of the 3.31% average annual growth in revenues, TFP growth contributed 1.90 percentage points (pct. pts.); growth in output prices added 1.43 pct. pts.; while growth in input quantities contributed - 0.02 pct. pts. (i.e. fewer inputs). Therefore, real output growth (or revenue growth less output price growth) was 1.88 pct. pts., revealing that TFP's 1.90 pct. pts. growth contribution was fully responsible for real output growth with fewer inputs. Since revenues measure incomes, these results suggest that policy should focus more on measures to foster TFP growth than on specific price or quantity instruments to enhance income growth.