On the Relationship between Gross Output-based TFP Growth and Value Added-based TFP Growth: An Illustration Using Data from Australian Industries

Diewert (2015) develops simple expressions for the exact relationship between value added TFP growth and gross output TFP growth. These expressions suggest that the magnification factor relating the two TFP growth measures is approximately equal to the share of primary inputs in total costs. We apply these simple approximations to data on Australian industries, finding that they tend to provide very close approximations over short time periods, but are less reliable over longer time horizons. We find that magnification factors vary significantly across industries so that the results of comparative studies can be quite sensitive to the choice of output measure chosen to construct TFP. In particular, industries in which intermediate inputs account for a large share of total inputs exhibit much smaller TFP growth (in absolute value) compared to industries where intermediate inputs are relatively unimportant when gross output is used to construct TFP measures rather than value added. I T HAS LONG BEEN KNOWN THAT the mea-