Show how growth accounting can be used to forecast potential GDP
The idea
Growth accounting splits output growth into its sources. With a Cobb–Douglas function and α as capital's share of income, potential GDP grows at g = TFP growth + α × capital growth + (1 − α) × labour growth. The labour productivity approach is simpler: potential GDP grows at g = growth in labour input (such as total hours) + growth in labour productivity. Hours combine the labour force and average hours per worker, so falling hours per worker offset some labour force growth. Forecasting means projecting each piece, usually holding TFP near trend. The traps are swapping the weights and adding TFP on top of labour productivity growth, which already contains TFP and capital deepening.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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