Cost Structure and the Measurement of Economic Performance: Productivity Growth, Utilization, Cost Economies, and Related Performance Indicators

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Date: July 2001
From: Southern Economic Journal(Vol. 68, Issue 1)
Publisher: Southern Economic Association
Document Type: Article
Length: 1,392 words

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Catherine J. Morrison Paul

Norwell, MA: Kluwer Academic Publishers, 1999. Pp. xiv, 363. $129.95.

This book, a revised version of Professor Paul's 1992 monograph, examines the measurement of productivity growth (as a measure of economic performance) from the production and cost function perspectives, and its decomposition into technical change and scale economies components. Productivity growth is measured as the growth rate in output (or outputs in the case of multiple outputs) minus a weighted average growth rate in inputs. Technical change occurs when a larger maximum quantity of output can be produced from a given quantity of inputs. From the cost side, technical change is measured by the rate of decline in total cost over time, accounting for other factors that could affect total cost. Scale economies refer to the proportional change in output due to a change in inputs by the same proportion, all other factors held constant. From the cost side, scale economies are typically measured using the total cost elasticity with respect to output.

The total cost elasticity can be used to obtain an accurate measure of scale economies when there is one output, exogenous input prices, and all inputs change by the same proportion. The presence of fixed inputs, multiple outputs, endogenous input prices, and other factors affect the cost elasticity independent of output. The computed cost elasticity with respect to output would include these factors, and as a result does not provide an accurate measure of scale economies. Cost economies are referred to as the impact on total cost of a change in output, accounting and adjusting for fixed inputs, multiple outputs, endogenous input prices, and other factors that could affect total cost. The measure of cost economies is the total cost elasticity when these factors are taken into account. The measure of scale economies, computed using the total cost elasticity independent of other factors that can affect total cost, is a component of the measure of cost economies. The author analyzes how externalities, public go ods, fixed inputs, regulation, and other factors can affect production cost, productivity growth and its components, and...

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Gale Document Number: GALE|A77498540