Measuring Total Factor Productivity: Accounting for cross country differences in income per capita

Why are some countries so much richer than others? Why do some countries produce so much more output per worker than others? Influential works by Klenow & Rodriguez-Clare (1997), Hall and Jones (1999), and Parente & Prescott (2000), among others, have argued that most of the cross country differences in output per worker is explained by differences in total factor productivity. Total factor productivity measurement enables researchers to determine the contribution of supply-side production factors to economic growth. Development Accounting is a frst-pass attempt at organizing the answer around two proximate determinants: factors of production and efciency. It answers the question “how much of the crosscountry income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efciency with which capital is used’’? In this article, we will outline framework for growth accounting to account for cross-country difference in income of Republic of Srpska, Republic of Croatia and Republic of Serbia. Te current consensus is that differences in income per worker across countries do not arise primarly from differences in quantities in capital or labour, but rather from differences in efciency with which are these factors used. We fnd that total factor productivity is very important for the growth of output per worker, but only in cases of Serbia and Croatia. In case of Srpska the most important factor for the growth of output per worker is growth of capital