What Are the Shortcomings of Using the Production Model

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The Answer is As is demonstrated in the text, the model tends to overestimate per capita real GDP. This is in part due to the fact that we assume a = 1/3 in the model

As is demonstrated in the text, the model tends to overestimate per capita real GDP. This is in part due to the fact that we assume a = 1/3 in the model a = 1 is the same across all countries; however, there is no reason that for different countries. What is also missing is total factor productivity ( ), which is an unknown or unobservable or residual factor, or . We can measure it if we have both y and k and assume a =1/3 and substitute into the above equation, . But, if we could measure it directly, given the production function, if .

a = 1 is the same across all countries; however, there is no reason that

for different countries. What is also missing is total factor productivity (

), which is an "unknown" or unobservable or "residual" factor, or

.
We can measure it if we have both y and k and assume a =1/3 and substitute into the above equation,

. But, if we could measure it directly, given the production function,

if

.

What Are the Shortcomings of Using the Production Model

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