Mapping Prices Into Productivity In Multisector Growth Models

Two issues related to mapping a multi-sector model into a reduced-form value-added model are often neglected: the composition of intermediate goods and the distinction between value added productivity and gross output productivity. The authors demonstrate their quantitative significance for the case of the well known model of Greenwood, Hercowitz and Krusell (1997), who find that about 60% of economic growth can be attributed to Investment-Specific Technical Change (ISTC). When they recalibrate their model to allow for even a small equipment share of intermediates, they find that ISTC accounts for almost the entirety of post-war US growth.