The Measurement of Total Factor Productivity

Abstract

The present study is devoted to measure the total factor productivity growth for

the economy of Pakistan. The method, which is used to measure the total factor

productivity, is conventional growth accounting technique; mainly neo-classical

production function with two factors of production (capital and labor) is taken along with

income shares of labor and capital. Data used in this study is taken on annual basis and it

covers a range from 1970 to 2006 with 37 observations. Data is taken from various issues

of “economic survey” and federal bureau of statistics (1998). The results showed that

capital input play a key role in the improvement of GDP growth while, on the other hand,

labor input have insignificant effect to increase the GDP growth. It is also observed that

TFP growth remains important in the decades of 1970s and 2000 and remains less

significant in other decades. Periods of high TFP growth were also the periods of high

GDP growth and vice versa.

1
2
 Chapter 1

INTRODUCTION:

1.1 Introduction:
Countries experience large differences in the development of their productive

capacities and in the improvement of their standard of living. While some countries

achieve rapid growth of income and high standard of living, others remained mired at a

level of development that does not assure the subsistence needs of the population. There

are several theoretical models that explain the growth rate of a country’s real GDP per

capita.controversy still exists, however, concerning the most important determinants of

economic growth. While some think that physical capital accumulation plays the

dominant role, others argue that growth in total factor productivity (TFP) provide the

dominant source of output growth.

Total factor productivity is a concept, which has been formalized comparatively late.

Although origin of the idea on its existence might be sought as early as the classical

schools, more serous attempts to find some quantitative measures, are observed after 30s

of XXcentury.behind this concept most often stands the understanding that besides the

traditional factors of production labor and capital there is something else that drives

production to increase.usualy this ‘thing’ is associated with technological progress. the

technological progress itself can be interpreted in various ways, but eventually it always

implies that the combination of labor force,machines,human skills and knowledge, leads

to change in total income that are not expected by changes in capital or labor considered

separately.

Total factor productivity is very important, because, large differences in per capita

incomes of developed and developing countries not explain by capital stock and labor

3
input separately capture by total factor productivity. Some of the current huge

international income differences are a consequence of what happened to total factor

productivity subsequent to the beginning of modern economic growth. The South Korea

and Philippines provide a dramatic example. In 1960, both these countries had already

entered into modern economic growth and had similar productivity and income levels. In

1995, however, South Koreans were, on averages, four times richer than Filipinos. The

reason is that in the 1960-95 periods, South Korea experienced what is by historical

standards incredibly rapid growth, while the Philippines grew slightly slower than the

world average.

The reason current income differences are huge is that sustained growth in total factor

productivity and in resulting growth in per capita income began at different dates in

different countries and proceeded at different rates. The reason residents of Western

Europe and the countries they settled were, on average, 12 times richer than residents of

china in 1950 is that sustained growth in total factor productivity began about 1800 in the

west, well over 100 years before it began in the years around 1800, the west was only

slightly richer than china. After 1800, total factor productivity grew steadily in the west,

while it remained more or less constant in china up to 1950.this is what led to large

differences in per capita income between the west and china in 1950. A successful theory

of total factor productivity must explain why china’s total factor productivity did not

begin its sustained growth until well into the twentieth century.

So, all this encourage me to estimate the total factor productivity for Pakistan economy

and see that how much variation in output growth would explain by the factor inputs such

as labor input and capital stock. It will also help to seek that how much variation in

4
output growth would not explain by factor inputs (which is also total factor productivity).

For that purpose, I want to update the work of Safdar ullah khan (2006).

1.2 Objective of the study:

Objectives, in any study, play a vital role because they provide foundation of any

research. So the main objective of the present study is to estimate the total factor

productivity growth for the economy of Pakistan.

Other objective is to see how much the capital and labor inputs are significant in

explaining output variation.

1.3 Plan of study:

In the present study, we will proceed further as follows,

In the next section the literature review of earlier studies will be given. in the third

section, the theory of the topic will be given. Fourth and fifth section will discuss

methodological issues and variable construction respectively. in the sixth section, I will

describe all the empirical results and discussion of the present study. Last section will be

on summary and conclusion.

5
 Chapter 2

LITERATURE REVIEW:

2.1 Introduction:

In this chapter, I will discuss all the previous empirical studies, which have been used to

estimate the total factor productivity. What others have done and which method they used

for the measurement of TFP.I will also discuss that what were the empirical findings from

previous studies.

2.2 Review of earlier empirical studies:

In literature, many persons used to measure the total factor productivity

quantitatively.

Rosegrant et al (1995) measured total factor productivity in Indian agricultural sector.

The methodology used was Tornqvist-Theil TFP index. The advantage of using this

technique is that it accounts for changes in the quality of inputs. But this index has further

crucial assumption of competitive behavior, constant retuns to scale, Hicks-neutral

technical change, and input-output separability. The data set covers a period from 1956 to

1987 in which Tornqvist-Theil TFP indices were computed for 271 districts covering 13

states in India. Finally, they concluded that substantial productivity gains, as measured by

total factor productivity indexes, have been realized in India’s agriculture. These gains

have varied somewhat by period (being highest in the green -revolution period) but in

each period examined, India has realized gains. Total factor productivity growth has

contributed roughly 1.1 percent per year to crop production growth in India.

6
Another study done by Shujat (2004) in which he measured total Factor productivity for

Pakistan’s agriculture sector. The data used in the analysis covers a range from 1960 to

1996.the most frequently applied techniques for measuring total factor productivity

growths in agriculture are: (a) Arithmetic index (AI); (b) Tornqvist -Theil index (TTI). In

this study, total factor productivity has been estimated by using both techniques.tornqvist-

Theil index used in the study was more appropriate, because using the technique of

Arithmetic index, the results mostly depends on the weights used in the analysis. He

concluded that TFP grown at an average annual rate of 2.3 % for the entire period (1960-

61 to 1995-96). This accounts for about 58% of the total output growth in the country

during this period. The chief source of the growth in TFP has been the technological

progress embodied in the high-yielding varieties of gains and cotton with supporting

public investment in irrigation, agricultural research and extension, and physical

infrastructure.

Cororation and Cuenca (2001) updated the TFP estimates of cororation and Caparas

(1999) from 1980 –1996 to 1980-1998 for Philippines economy, using growth accounting

method in Tran slog form at the level of economy and major sectors of the economy.

Some insights were drawn from the estimates. At the sectoral level, the results are mixed.

Some sectors showed improvement in TFP in the 1990s, while others have declining TFP,

Especially non-tradable service sectors, like real estate. Because of this the economy as a

whole saw declining in TFP in 1990s.the decline may be due to movement of capital

towards the non-tradable sectors during the period when foreign capital inflow surged,

which in turn aggravated by the prolonged real appreciation of the local currency.

7
Di Jin et al (2002) developed estimates of total factor productivity change in the new

England ground fish fishery from 1964 to 1993, using the technique an adjusted

Tornqvist change index, a procedure similar to Squires’ (1992, Rand J. Econom. 23(2),

221-236) method, which extends standard TFP measurement by including the effect of

fluctuations in stock abundance. They concluded that TFP increased on average by 4.4%

per year from 1964 to 1993.a higher average rate of increase occurred between 1964 and

1982, possibly due to new technologies (e.g., fish finders). TFP showed a declining trend

at 0.33% annually from 1983 to1993.

In one study, by using the growth accounting technique, Abramowitz (1956) found that

only 10% of the output growth per person in United States from 1869-78 to 1944-53 is

associated with growth of factors of production, and 90% of output growth is associated

with total factor productivity. Another study done by the Solow (1957) and found that the

accumulation of physical capital accounts for roughly 12% of output growth per- hour

worked in the united states from 1900 to 1949 with the remaining 88% attributed to the

growth of TFP.although later work has reduced this unexplained residual, it is far from

zero in work by Kendrick (1961), Denison (1985).

So, all this shows that total factor productivity is very important.

8
 Chapter 3

THEORY:

Growth accounting provides a breakdown of observed economic growth into

components associated with changes in factor inputs and a residual that reflects that

technological progress and other elements (Barro, 1999). The basics of growth

accounting were presented in Solow (1957), Kendrick (1961), Denison (1962,1967),

Maddison (1982), Jorgenson and Griliches (1967). The residual component is usually

named the Solow residual in the literature since the seminal paper of Solow (1957) or our

“measure of ignorance” on the causes of growth (Denison, 1962).

One factor contributing to the growth of total factor productivity is increases in what

Kuznets (1966) calls useable knowledge. This factor explains why total factor

productivity in the united states is four times greater today than it was in 1850.this factor

does not explain why total factor productivity in the united states is about four times

greater today than it is in India. Knowledge used in the United States is there to be used

by Indians to increase their total factor productivity. The reason that Indian workers are

less productive after correcting for stocks of tangible and intangible capital is that this

useable knowledge is not as fully exploited there as it is in the United States. A successful

theory of international income differences must explain why this is the case.

Until recently, all major civilizations have had roughly the same standard of living. There

was output growth, but populations increased so as to keep the standard of living

constant. Sustained increase in per capita output, which Kuznets (1966) calls modern

economic growth, is recent phenomenon.begining of modern economic growth in

England is about 1780 and slightly later in the United States and continental Europe. A

9
successful theory of TFP must explain why TFP began to grow after being constant for

over five millenniums.

10
 Chapter 4

METHODOLOGY:

4.1 Introduction:

This chapter is devoted for methodological issues. In this chapter, I will discuss

the estimation technique for the present study.

4.2 Econometric Model:

There are many techniques and approaches to measure the total factor

productivity. But, in this particular study, the method, which I have chosen to measure the

total factor productivity for Pakistan economy, is similar to safdar ullah khan (2006, SBP

research bulletin, vol. 2, No.2). I have chosen the conventional growth accounting

process for the estimation of total factor productivity. I chose this method, because, we

know that different factors have some role to play in determining how much output a

country can produce. For example, factors of production such as size of the labor force

and capital stock certainly matter; but a large number of other things such as government

regulation, education, and even the weather have their roles to play. Any theory of

economic growth has to make a choice on which of these factors to emphasize as a main

source of economic progress or as an explanation of income differences across countries.

Instead of comparing and evaluating different theories, it would be useful to have direct

evidence on those factors that are important for growth. This is only possible through

growth accounting framework as it helps to segregate TFP from other sources of

economic growth.

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Empirical growth accounting exercise uses the aggregate neo-classical production

function to decompose the growth rate of aggregate output into contributions of growth

of measured inputs and improvements in TFP.in literature, the cobb-dougles production

function with the share of capital set to a “bench-mark” value of one third for all

countries has typically been used [Young (1995) and Krugman (1994)]. However, I start

with two inputs- capital and labor and compute their specific shares through the simple

ordinary least squares (OLS) method. The production function can be written as;

--------------------------------(a)

Where ‘Y’, ‘K’ and ‘L’ are output (GDP), capital and labor respectively, and ‘A’ is

the level of productive efficiency, so called TFP.in next step, I differentiate the above

production function with respect to time, and obtain the growth rate of output

decomposed into sources of growth: improvement in productive efficiency and

increase in factor inputs and . Differentiating equation (1) with respect to time

and simplifying:

-------------------------------(b)

Aƒk and Aƒl are the marginal products of capital and labor, respectively, which

are equal to rental and wage rates if markets are competitive and firms maximize their

profits. Then, and are the shares of compensation to capital (αk) and

labor (αl) in total output respectively. Since the share of capital income is one minus the

share of labor income under the assumption of constant returns to scale, the growth rate

12
of output is decomposed into TFP growth and the weighted sum of growth of capital and

labor is as follows:

Ỷ/Y = Ả/A + α (Ќ/K) + β (Ĺ/L)…………………………………………. ( c )

I have data on growth rates of output and inputs along with factor income shares. We can

write above equation in the following way:

Ả/A = Ỷ/Y - α (Ќ/K) - β (Ĺ/L) ……………………………………… (d)

I will measure the TFP growth from above equation.

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 Chapter 5

DATA AND VARIABLE CONSTRUCTION:

5.1 Introduction

In this chapter, I will discuss the source of data, data format and nature of the

data. I will also discuss that how the variables are generated.

5.2 Data format, Data source, Region and Period of analysis:

Since this study is used for Pakistan economy. In this study, data is used on annual

basis which covers a period from 1970 to 2006.it contain 37 observations. Data set is

taken from federal bureau of statistics (1998) and government of Pakistan: economic

survey of Pakistan.

5.3 Construction of variables:

5.3.1 Measures of output:

There are different measures of output used in the literature, but in present study,

we use real GDP, as an output growth indicator in the growth accounting model.

5.3.2 Measures of labor input:

Labor input can be measured in many ways. For example, labor input is measured

as the number of hours worked. However, the time series data on working hours is not

available in Pakistan. In addition, due to emerging importance of human capital that may

affect worker quality, labor input is adjusted by a quality change generally measured by

the increase in schooling years.but; here again we face the same problem of data non-

availability. So, in present study, we have measured labor input as the number of workers

14
in the economy as reported in various issues of “economic survey” and series ranges from

1970 to 2006.

5.3.3 Measures of capital input:

We use the perpetual inventory method for the estimation of capital stock, which

takes the stock of capital as the accumulation of the stream of past investments:

Using the concept of initial capital stock , we follow Nehru and Dhareshwar (1993)

in the construction of capital stock series:

Where, is the rate of geometric decay and is the initial capital stock in period

zero. Initial capital stock can be estimated in a number of ways. Nehru and Dhareshwar

(1993) use a modified harberger (1978) method to compute . The value of investment

in the first period is estimated through a linear regression of the log of investment against

time. The fitted value of initial investment is used to calculate initial capital stock using

the following equation:

In above equation, g is the compound growth rate of output (GDP) and is the

depreciation rate of capital. The other important estimate needed is depreciation rate.

Many studies [Nehru and Dhareshwar (1993) and Collins and Bosworth (1997)] have

chosen 4% depreciation rate per year and I also use the same value.

15
 Chapter 6

RESULTS AND DISCUSSIONS:

6.1 Introduction:

In this chapter, the interpretation of variables will be given as well as the empirical results

of the present study will be reported.

6.2 Results and Discussion:

First of all, I have estimated equation (1) and calculated income shares of labor and

capital input by using ordinary least square method. From the results, it is concluded that

output is subject to increasing returns to scale.e-g if both capital and labor will double;

output will increase by more than double. The results of the regression are given below in

Table01:

TABLE01

Dependent Variable: LOG(Y)

Method: Least Squares
Date: 03/24/02 Time: 22:08
Sample(adjusted): 1972 2006
Included observations: 35 after adjusting endpoints
Convergence achieved after 16 iterations

Variable Coefficient Std. Error t-Statistic Prob.

C -2.521461 1.080162 -2.334336 0.0265

LOG(K) 1.119109 0.117164 9.551630 0.0000
LOG(L) 0.054627 0.190477 0.286789 0.7762
AR(1) 1.251572 0.167248 7.483326 0.0000
AR(2) -0.399853 0.170573 -2.344172 0.0259

R-squared 0.998610 Mean dependent var 12.93958

Adjusted R-squared 0.998425
S.E. of regression 0.020631 F-statistic 5388.563
Sum squared resid 0.012769 Prob (F-statistic) 0.000000

Durbin-Watson stat 2.150097

16
From the above given table, I have calculated both the elasticity of output with respect to

capital as well with respect to labor input. The coefficient of capital, which is also the

elasticity, is equal to 1.119.it is interpreted as if capital increases by 1%, as a result,

output will increase by 111.91 %. This coefficient is highly significant even less than 1%

level of significance. In this case, capital stock is very important variable in determining

the output.

The coefficient of labor input, which also serves as elasticity, is equal to0.0456.it shows

that if labor force increases by 1%, as a result, output would increase by 5.46%. But t-stat

of the coefficient is very low and p-value of coefficient suggests that labor input is

insignificant.

To check the overall model’s performance, I will proceed further as follows;

R-Squared of the model is quite high e-g 0.9986.which explains that 99.86% of the
variation in output is explained by the given inputs.but, we cannot rely solely on R-
Square, because, it do not incorporate degrees of freedom. To overcome that problem, we
have Adjusted R-Square
Adjusted R-Squared of the model is also very high e-g 0.9984.which also indicates that
inputs are true in explaining the variation in output.
Durban-Watson stat. in the above table is equal to 2.1500.initially, the Durban-Watson
stat is very low, suggesting the presence of 1st order auto-correlation. I used the
iterative procedure to rule out the autocorrelation from the data. The results in the
above table are given after removing the autocorrelation from the model.
F-Statistic of the model has a very high value e-g 5388.563, which is greater than the

critical value of F-Stat, and also p-value of F-Stat is very less. All this shows

that overall model’s performance is quite well.

17
6.3 Analysis:

6.3.1 Growth in output and inputs

Growth rates of output and growth rates of inputs are given in figure1.in figure 1; output

growth is given along with different combinations of factor inputs. Trend of the three

variables is also shown in the figure1. GDP followed a cyclical pattern. But, on the other

hand, input growth is volatile in nature.

Figure 1. GDP growth and inputs growth

Initially, during 1970s, GDP growth rate was 4.4 percent along with the combination of

3.4 percent growth in labor and 4.2 percent growth in capital input

18
In the subsequent decade of 1980, there is an upward movement in GDP to6.1 percent

annual growth rate. The improved GDP growth of 6.1 percent during the 1980s is due to

the growth of 4.8 percent in capital and 2 percent in labor input

In the decade of 1990s, overall behavior is different regarding the output growth and

growth in factor inputs. In 1990s, output growth were 4.4 percent, which is equal to the

capital growth, but labor input growth remains constant in mentioned period. The factor

inputs growth rates in 1990s were not too low to depress the GDP growth, but mere factor

inputs could not always increase the GDP growth. It means that growth in TFP has also

an important role to play in increasing output growth along with factor inputs.

Finally, I conclude from above discussion that factor inputs (labor and capital) are

complementary in improving the output growth, but, they do not exactly account for

economic growth. As in our case, capital is very important input, but not the only factor

in driving economic growth.

6.3.2 Output growth and TFP growth

Figure 02 represents the graphical explanation of both GDP and TFP growth.series1

represents the GDP growth and series2 represents the growth in TFP. It is observed that

the growth of GDP followed identical behavior throughout the period of observation. It is

clear from figure02 that if growth of TFP rises, GDP growth will also move upward and

vice-versa. During 1960s, -0.346 percent growth of TFP followed by 4.8 percent growth

of GDP was observed.TFP growth and GDP growth are given in appendix.

However, in the next decade of 1980s, the TFP growth was improved to0.7053

percent.similarly; GDP growth took momentum and increased to 6.1 percent. With

reference to equation (d), a change in TFP reflects the change in output that cannot be

19
accounted for by the change in combined factor inputs.TFP as a result reflects the joint

effect of many micro and macro factors including marginal skills, new technologies

,economies of scale and research and development(R&D).In 1990s,TFPgrowth

diminished from 0.7053 percent in 1980s to-0.999 percent resulted into 3.9815 percent

relatively lower growth in GDP.in 2000,TFP got increased to 2.04 percent, as a result,

output increased to 5.34 percent.so,it is concluded that TFP and GDP are correlated very

significantly.

Figure 02 TFP and GDP Growth

0.1
0.08
0.06
0.04
Series1
0.02
Series2
0
-0.02
19 -71

19 -75

19 -79

19 -83

19 -87

19 -91

19 -95

20 -99

3
-0

-0.04
70

74

78

82

86

90

94

98

02
19

-0.06

20
Chapter7

SUMMARY AND CONCLUSIONS

It is noted that the total factor productivity is very important in determining the output

growth differences among countries. So, the present study is devoted to measure the total

factor productivity growth for the economy of Pakistan. The method, which is used to

measure the total factor productivity, is conventional growth accounting technique.

Mainly neo-classical production function with two factors of production (capital and

labor) is taken along with income shares of labor and capital. Data used in study is taken

on annual basis and it covers a range from 1970 to 2006 with 37 observations. Data is

taken from various issues of “economic survey” and federal bureau of statistics (1998).

Three variables are used in analysis: real GDP, labor input is taken as number of

employed workers in the economy, and capital stock is measured by the “perpetual

inventory method”. Finally, one limitation of using the growth accounting technique for

the estimation of TFP is that this framework is extremely informative on the relations

21
among various variables if continuous data are used. But; we know that measurement in

economics is rarely done continuously. By using continuous framework for discrete data

may lead to inaccuracy in obtained results.

It is concluded that capital is very important input in moving the output growth upward.

Labor input is not very significant in our case.so, merely growth in labor force donot adds

to GDP growth. TFP remains very important in determining the output trend. As periods

of improvement in TFP growth were also the periods of high GDP growth and vice-versa

in case of Pakistan.so, growth in TFP reflects the improvement in productive efficiency of

economy, investment in research and development(R&D), managerial skills etc.

Further study can be done on a number of countries to see whether TFP is significant in

determining the growth differences among countries and whether TFP is stable among

countries as well as whether TFP Growth is sustainable in long term growth of economy

or not.

22
REFERRENCES:

Abramowitz M (1956). “Resource and output trends in the united states since 1870,”

American economic review, 46(2), 5-23.

Ali S (2004). “Total factor productivity growth in Pakistan’s agriculture,” The Pakistan

development review, 43(4), 493-513.

Collins S M and Barry P B (1996). “Economic growth in south Asia: Accumulation

versus Assimilation,” Brookings papers on economic activity, vol.2: 135-191.

Cororation, Caesar and Janet Cuenca (2001).”Estimates of total factor productivity in the

Philippines.” PIDS discussion paper.

Denison E F (1985). “Trends in American economic growth”, 1929-1982. Washington,

DC: Brookings institution.

Di Gin, Eric Thunberg, Hauke Kite-Powell, and Kevin Blake (2002). “Total factor

productivity change in the new England Ground Fish Fishery,” Journal of Environmental

Economics and management, vol.44: 540-556.

23
Edward C. Prescott (1997). “A theory of total factor productivity,” Federal Reserve Bank

of Minneapolis, research department staff report 242.

Harberger A (1978). “Perspectives on capital and technology in les developed countries,”

In M.Artis and A.R. Nobay (Eds), Contemporary economic analysis. (London: Croom

Helm), 69-151.

Kendrick J (1961). “Productivity trends in the United States.” Princeton: NBER.

Khan S U (2006). “Macro determinants of total factor productivity in Pakistan,” SBP

Research Bulletin, 2(2)

Krugman P (1994). “The Myth of Asia’s miracle,” Foreign affairs, 73(6): 62-78.

Kuznets S (1966). "Economic growth and structure: selected essays by Simon Kuznets,"

(London: Heinemann).

Mark W. Rosegrant and Robert E. Evenson (1995)," Total factor productivity and long-

term growth in Indian agriculture," EPTD Discussion paper, Washington, D.C.20036-

3006 U.S.A.

Nehru V, and A Dhareshwar (1993), “A new data base on physical capital stock: source,

methodology, and result,” Revista de analysis economico, vol. 8: 37-59.

Solow R (1956). “A contribution to the theory of economic growth,” Quarterly journal of

economics, 70, 65-94.

Young A (1995). “The tyranny of numbers: confronting the statistical realities of the East

Asian growth experience,” Quarterly Journal of Economics, CX: 642-680.

24
APPENDIX

Testing the presence of autocorrelation:

Dependent Variable: LOG(Y)

Method: Least Squares
Date: 03/25/02 Time: 10:46
Sample: 1970 2006
Included observations: 37
Variable Coefficient Std. Error t-Statistic Prob.
C -1.979794 0.985599 -2.008721 0.0526
LOG(K) 1.045669 0.128478 8.138898 0.0000
LOG(L) 0.187782 0.231399 0.811504 0.4227
R-squared 0.993847 Mean dependent var 12.88935
Adjusted R-squared 0.993485 S.D. dependent var 0.548260
S.E. of regression 0.044252 Akaike info criterion -3.320214
Sum squared resid 0.066581 Schwarz criterion -3.189599
Log likelihood 64.42395 F-statistic 2745.953
Durbin-Watson stat 0.268992 Prob(F-statistic) 0.000000

Since the data is time series .so, there are chances of autocorrelation. From above

table, value of Durbin Watson stat is 0.2689 which is quite low suggesting the positive

autocorrelation of first order. In the next step, I used iterative procedure to remove the

autocorrelation from the model. Results are given in the table below

table 2

Dependent Variable: LOG(Y)

Method: Least Squares
Date: 03/24/02 Time: 22:08

25
Sample(adjusted): 1972 2006
Included observations: 35 after adjusting endpoints
Convergence achieved after 16 iterations
Variable Coefficient Std. Error t-Statistic Prob.
C -2.521461 1.080162 -2.334336 0.0265
LOG(K) 1.119109 0.117164 9.551630 0.0000
LOG(L) 0.054627 0.190477 0.286789 0.7762
AR(1) 1.251572 0.167248 7.483326 0.0000
AR(2) -0.399853 0.170573 -2.344172 0.0259
R-squared 0.998610 Mean dependent var 12.93958
Adjusted R-squared 0.998425 S.D. dependent var 0.519815
S.E. of regression 0.020631 Akaike info criterion -4.792483
Sum squared resid 0.012769 Schwarz criterion -4.570291
Log likelihood 88.86846 F-statistic 5388.563
Durbin-Watson stat 2.150097 Prob(F-statistic) 0.000000
The vlue of durbin Watson increase to 2.15 which shows that autocorrelation has been

removed from the model. we can also compare the t-values before and after the removing

of autocorrelation from the model. T-values, after applying the iterative procedure also

improved.

TFP growth and GDP growth

Years GDP growth TFP growth

1969-70
1970-71 0.01547606 -0.0410611989-90 0.04327608 -0.012018
1971-72 0.01454997 -0.0320411990-91 0.05319702 0.001014
1972-73 0.06552916 0.026031991-92 0.07705296 0.022418
1973-74 0.05319883 0.0159971992-93 0.01758317 -0.041764
1974-75 0.03230031 -0.0097571993-94 0.03737416 -0.020841
1975-76 0.0460653 0.0059651994-95 0.04962609 -0.00162
1976-77 0.037996 -0.0301521995-96 0.04846581 -0.00365
1977-78 0.08045778 0.0113391996-97 0.01014396 -0.044817
1978-79 0.04763526 -0.014831997-98 0.02550234 -0.020909
1979-80 0.08738365 0.0338681998-99 0.03660133 -0.001815
1980-81 0.06888369 0.0174971999-2000 0.04260088 0.012127
1981-82 0.06537477 0.020372000-01 0.01982484 -0.014012
1982-83 0.06778391 0.0178332001-02 0.0322443 -0.003692
1983-84 0.05065203 -0.0041312002-03 0.04846321 0.016109

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1984-85 0.07592112 0.0208422003-04 0.07368571 0.039116
1985-86 0.05501653 -0.0041582004-05 0.07667304 0.04996
1986-87 0.06452339 0.0026062005-06 0.06920301 0.035023
1987-88 0.07625279 0.017864
1988-89 0.04833969 -0.006178

In above sheet, both the growth of TFP as well as GDP growth is given.

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