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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

Can we Interpret Pakistan`s


economic Insights by a coub
douglas production Function?
Abstract
Can aggregate production model of economy like Pakistan is justifiable with the help of a coubdouglas model. Whether we can compute the insight on relationships that existed between the
inputs and outputs, simply by drawing functions of production in this arrangement, we have
used data from inputs and outputs and applied regression models to test the framework in an
economic simulation. Conclusive relationship was observed, justifying that economic variations
in outputs of Pakistani economics can be explained and estimated by a coub Douglas function
with reliable effectiveness.

Introduction
Computing a function to justify the relationship between factors of productions was primarily a
micro level phenomenon, it provided basis for justification of answering the most difficult
questions ever raised by any economist.
As the economic school of thought gained evolution this principle was started to answer the
Macro level productions outputs related anomalies, however the models were always criticized
and skeptics emerged with a question that whether the function of specific model represent
true economic relationship or not.
One of such model was Coub-Douglas Model of production which described the aggregate
production in a function and can be used to justify the economic phenomena on a macro level
but still the questions evolves that whether it fits the variable of the country level economic
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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

scales. Its applicability to asses depends from country to country depending upon the strength
of data availability. We therefore decided to test the model on Pakistan economic indicator in
order to find whether our production related researches can or cannot be done using subject
model.

Literature Review
Cob Douglas function (Charles W Cobb, Paul H Douglas, 1928) discovered relationships between
Labor, capital and product. It is one of the frequently used functions for computing aggregates
of outputs/productions. It represents real relationship among variables of productions (capital,
tech-change & wages) as wage impact turns constant most of the time (Franklin M. Fisher, Oct
1970).(Herbert A Simon & Ferdinand K Levy, 1970) also affirmed strong pragmatic evidences of
the economic relationship after simulating diverse applications of this function with aggregate
production in their critically analytical research work.
The effectiveness and reliability of the function was further confirmed by working papers of the
central bureau of statistics of Norway, where they analyzed Noted Elasticities of Variables in
different Industrial Sectors to alter the Output at optimum level (Vidar Ringstad, 1967).
Although there were few researchers who argued the idea of using Cob-Douglas function as
appropriate aggregate production function ,one of such example is (Pol Antr`as,2004) it argued
that a Cobb-Douglas specification of the U.S. aggregate production function may be misleading.
Controlling for biased technological change, the elasticity of substitution between capital

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

and labor is likely to be considerably below one, and may even be lower than
0.5. This contrasts with the results of Berndt (1976).
It is notable that relationship discovered and explained during different subsets for growth
projections and Production outputs model based on Coub Douglas, CES function and Knowles
assumptions (Richard R Nelson, 1964).
(Robert Sollow, 1957) concluded that Technical change during that period was neutral on average.
Gross output per man hour doubled over the interval, the aggregate production function, corrected for
technical change, gives a distinct impression of diminishing returns, but the curvature is not violent.

Studies (Joan Robinson, 1954) further discovered that, The rate of production on capital will
tend to be higher, and real wages lower if: the more plentiful are the technical opportunities
for mechanizing production; the slower is the rate of capital accumulation in relation to the
growth of population; the weaker is the force of competition and the weaker is the bargaining
power of the workers, when competition is weak.
GDP is used as development indicator which is very similar to aggregate production in a coub
Douglass arrangement, Real GDP tends to underestimate the increase in real domestic income
and welfare when the terms of trade improve. An improvement in the terms of trade is similar
to a technological progress, but when computing real GDP, the national accounts treat the
former as a price phenomenon and the latter as a real event.( Ulrich Kohli,2004)

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

In most of studies it was found that cob Douglas expression can be used effectively to judge the
relationship of the variables of production in relation to the aggregate level of production. A
model based on such assumption can affirm an economic relationship and its significance.

Hypothesis
With evidences from the primitive researches we concluded the following hypothesis to test
H1: A coub Douglas function can explain all the relationship between economic variable in
economics of Pakistan and justify aggregate production.
H: A coub Douglas function cannot explain all the relationship between economic variable in
economics of Pakistan and justify aggregate production.

Model
The crux of this research paper is to simulate the aggregate production function on economic
level with relational to inputs provision made through economic indicators data made available
by the government of Pakistan and World Bank.
Assumptions are made on the modified form of mathematical function of cob Douglas
(production function),

Y F(K,E L)
Where:
E is competence of labor, in use as an indicator of the level of technology
(manufacturing practice and scientific awareness etc)
Y -- The level of output (GDP). L -- The economy's labor supply (No of workers)
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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

K -- The economy's capital stock (Gross Capital formation).


The core purpose of the research is to gain insight of a real relationship between dependent
variables (wage, capital and technological advancements) and their impacts in relation to the
relevant GDP of the period.
The Assumption is made simple if the GDP is the total production of any country it can be
termed as output = Y that resembles the total output as suggested by Coub and Douglas in their
production function.
Keeping the aggregate technology as constant (Limitation due to UN 2008 reporting model of
adopted by Govt of Pakistan for macroeconomic reporting) we can test the relational
significance of labor and capital pass into economy. The actual gross domestic product however
can serve as a benchmark for comparative analytical rationale if the relationship further tested
for CES techniques.

Data
Time Series data is selected from 1990 2010
from Pakistan economic indicators.
Due to Limitation in availability of data the
data set is constrained to 21 years.

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

Methodology
Periodic/historic data can be analyzed to test the significance of independent variables over the
dependent variables by using Statiscal techniques i.e. regression analysis (Least Square
Method), Granger causality test for checking overall auto correlations existences (if any).

Analysis & Findings


A regression analysis using least square was conducted. Ordinary least squares are a
statistical technique that uses model data to approximate the true population
association between two variables. It constructs a line that minimizes the computation
of the squared plumb distances from the line to the pragmatic data points. The findings
were:

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

Regression analysis are not free from the problem of auto correlation where by the
error terms of the variables often get interrelated and the results may seems vague if it
exists. Granger causality test was performed in order to check if the problem exists the
findings were :

Interpretation of Results

i.

Hypothesis is supported by evidence. The relationship between data is real and reliable.

ii.

P values for the variables tested in less than .1 that is conventionally treated as
significant. It tells how likely it is that the coefficient for that independent variable
emerged by chance.

iii.

t stat compares the error suggested by the null hypothesis to the standard error of the
estimate here in our case the T stats value are greater than 1.96 having probability
under or equal 0.05 suggests that the independent variables are significant predictors of
dependent variables.

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Seminar in Economic Policy

iv.

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

R square resulted 0.99 while adjusted R Square is 0.98 implies that 98% of variation in
responses can be explained by variables .it proves the model as whole have highly
reliable relationship.

v.

Overall significance of the model is judged by F Stats value and Prob F indicators; F stats
show a high value of 922 and Prob F results 0.000 indicates there is no chance for all of
regressive parameters can be zero.

vi.

No autocorrelation existed among variables of the model.

Conclusions

The imminent of economic relationships in economy of Pakistan can be computed with


accuracy by a coub douglas function styled function; one can practically estimates the trends of
possible output with ratios and build optimum production analysis by the this model of
production function. The study represented that the aggregate production of economic inputs
in Pakistan represented in real relationship by such functional form.
So the answer to the Title is YES it can .

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

References

A Note on the cob-Douglas Function ,Herbert A Simon & Ferdinand K Levy, The Review of
Economic Study Vol 30 ,No 2 (1963)

AGGREGATE PRODUCTION FUNCTIONS AND THE EXPLANATION


OF WAGES: A SIMULATION EXPERIMENT, by Franklin M. Fisher No. 61 October, 1970 Source:
LIBRARY OF THEMASSACHUSETTS INSTITUTE OF TECHNOLOGY

ECONOMIES OF SCALE AND THE FORM OF THE PRODUCTION FUNCTION


Progress Report No 6, prepared by Vidar Ringsted, Source: Scholars.Google.com,WORKING
PAPERS FROM THE CENTRAL BUREAU OF STATISTICS OF NORWAY Oslo, 7 June 1967

Is the U.S. Aggregate Production Function Cobb-Douglas? New Estimates of the Elasticity of
Substitution by Pol Antr`as, Contributions to Macroeconomics 4(1): article 4. Harvard
University ,April 2004 Source: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3196325

A Cross-Country Empirical Investigation of the Aggregate Production Function Specification


by JOHN DUFFY Department of Economics, University of Pittsburgh
& CHRIS PAPAGEORGIOU Department of Economics, Louisiana State University
published : Journal of Economic Growth, 5: 87120 (March 2000) Kluwer Academic Publishers.
Printed in the Netherlands JEL classification: O40, O47 Source: Scholars.Google.com

Aggregate production function & Medium range growth projections By Richard R Nelson ,
American Economic Review Vol 54,No 5 (Sep 1964 )

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Seminar in Economic Policy

Ahmed Faizan Kashmiri (Std 14447) 0333-3820172

The Production Function and the Theory of Capital By Joan Robinson The Review of Economic
Study Vol 21 ,No 2 (1953-54)PP 81-106

Real GDP, real domestic income, and terms-of-trade changes by :Ulrich Kohli Journal of
International Economics 62 (2004) 83 106 ,JEL classification: O11; O41; C43; F11

World Bank Economic indicator database & Labor Survey of Pakistan (Govt of Pakistan ,Various
years)

Technical Change and the Aggregate Production Function


Author(s): Robert M. Solow Source: The Review of Economics and Statistics, Vol. 39, No. 3 (Aug.,
1957), pp. 312-320

A theory of production BY Charles W Cobb,Paul H Douglas Mar 1928,The American Economic


Review Vol 18 Issue 1 Source : Jstor.org

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