Growth Accounting and Endogenous Technical Change

This study examines the validity of two conventional approaches to growth accounting under endogenous technical change. We find that the traditional approach to growth accounting, pioneered by Solow (1957), is consistent with the lab-equipment specification for technological progress, whereas the more recent approach, proposed by Hayashi and Prescott (2002) and Kehoe and Prescott (2002), is consistent with the knowledge-driven specification. We develop a unified approach to growth accounting, which in essence takes a weighted average of the Solow approach and the Hayashi-Kehoe-Prescott approach. We show that our unified approach is consistent with a more general specification for technological progress under which the degree of capital intensity in the innovation process determines the relative weight placed on the two approaches. Finally, we apply our unified approach to data of the Chinese economy to explore the quantitative importance of capital accumulation on economic growth in China.