Explaining economic growth through national data : an analysis using the factor price method

Abstract

This dissertation shows how the dual approach to growth accounting can be a useful complement to the traditional approach in assessing the reliability of national accounts statistics for the Maltese economy. Given the complexity involved in compiling national accounts, the dual approach has the advantage of using data on prices observed as an equilibrium outcome in the market. This does away with the restrictive assumptions imposed when using quantity data in traditional growth accounting, which may hinder the accuracy of national accounts statistics. A comparison of the average Total Factor Productivity (TFP) derived using the dual growth accounting method with average TFP using traditional growth accounting for the period 2002-2014 reveals significant discrepancies between estimates. On average, the dual approach yields much lower TFP estimates than the traditional growth accounting method. At first glance it seems that the inflated traditional TFP estimate implies inconsistency between factor inputs and their prices, suggesting imperfect data in Malta’s national accounts. However, in view of the data limitations hindering the study’s accuracy and the impracticable assertion underlying the TFPDUAL that markets are competitive, it would be imprudent to support the latter statement. These deductions suggest that any assessment of the contribution to economic growth by respective factors of production should be done with caution. In view of this ambiguity, although growth accounting models allow for a decent representation of reality, economists might want to consider rethinking the theoretical foundations underpinning the equality between growth accounting methods. Moreover, the study’s results may be useful to national accounts users, who should be made aware of potential data misspecifications.