The Solow residual is estimated using the following equation: A) r = g_Y - αg_K - (1-α)g_L. B) r = g_y + αg_k. C) r = g_y + αg_k + Z. D) r = g_Y + αg_K + (1-α)g_L.

Question

Quizplus · Accepted Answer

The Solow residual, also known as total factor productivity, measures the portion of output not explained by the amount of inputs used in production. The correct equation (A) reflects the growth in output (Y) minus the weighted growth in capital (K) and labor (L), where α represents the share of capital in production and (1-α) represents the share of labor. This formula isolates the effect of technological progress or efficiency gains on output growth, which is the essence of the Solow residual.

The Solow Residual Is Estimated Using the Following Equation