lnTFP = LnGDP - ( α*lnK + β*lnL)
if I have data on "α" and i calculate capital stocks using perpetual inventory method, can I calculate TFP using above equation?
if yes, then why literature suggest to use more complicated functions like derivatives and trans-log functions ?
Dear Vivake,
You can certainly calculate TFP using that simple form (this form gives you the Solow residual). The derivative of the log with respect to time gives you the growth rates. Hence you can calculate the growth rate of TFP.
I believe there is a reason why you would prefer to have it in growth rates. If you want to compute it to compare with other countries TFP you need to be careful because you need to use PPP-adjusted series. While if you have growth rates you can compare it.
If you want to use more complicated production functions you certainly can, or introduce additional inputs such as human capital. All you are doing is changing our measure of ignorance about production which is represented by the residual (TFP).
you can do it with the simple model you have mentioned. the complicated models are mean to add more factors which increase the explanatory power of the model,. it depends on your study objective. I personally always prefer simplicity in work
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