How Is the Solow Residual Measured? What Problems Arise in Its

question 12

Essay

How is the Solow residual measured? What problems arise in its measurement when resource utilization varies over the business cycle? What implications do these measurement issues have for evidence supporting the RBC model?

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Definitions:

High-low Method

A technique used in cost accounting to estimate variable and fixed costs based on the highest and lowest levels of activity.

Mixed Cost

A cost that contains both variable and fixed cost elements, changing with the level of output but not in direct proportion.

Mixed Cost

A cost composed of a fixed component and a variable component, changing in total with the level of activity but remaining constant on a per unit basis up to a certain production volume.

Variable Manufacturing Cost

The sum of all costs that vary with the level of manufacturing output, including direct materials, direct labor, and variable overhead.