Theoritical and Conceptual Frame Work on Waste Disposal Business

UDC: 519.866;330.11;330.35 JEL Classification: O47, E23 Keywords: potential output, production function, labor share, total factor productivity

Cobb-Douglas Production Function: The Case of a Converging Economy
Dana HÁJKOVÁ – Czech National Bank and CERGE-EI ([e-mail]) Jaromír HURNÍK – Czech National Bank, Institute for Economic Studies, Faculty of Social Sciences, Charles University, Prague, and Faculty of Economics and Public Administration, University of Economics, Prague ([e-mail]).*

Abstract The Cobb-Douglas production function is often used to analyse the supply-side performance and measurement of a country’s productive potential. This functional form, however, includes the assumption of a constant share of labor in output, which may be too restrictive for a converging country. For example, labor share in the Czech Republic gradually increased over the last decade. In this paper, we test whether this fact renders the application of the Cobb-Douglas production function unreliable for the Czech economy. We apply a more general form of production function and allow labor share to develop according to the empirical data. For the period 1995–2005, we do not find significant difference between the calculation of the supply side of the Czech economy by the Cobb-Douglas production function and a more general production function.

1. Introduction The performance of the supply side of an economy is often identified with the growth rate of potential output. Potential output is not observed in reality, however, and has to be approximated. The use of the production function method for the measurement of potential output growth takes into account different sources of an economy’s productive capacity, namely the contributions of labour, capital and total factor productivity, the latter containing information about technological and allocative efficiency and hence about the supply-side functioning.1 Using the production function, one can

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