Forecasting the Economic Growth in Romania with the Cobb-Douglas Production Function

• Author: Duguleana L.
• Position: Transilvania University of Brasov
• Pages: 157-174

Bulletin of the Transilvania University of Braşov

Series V: Economic Sciences • Vol. 12 (61) No. 2 – 2019

https://doi.org/10.31926/but.es.2019.12.61.2.19

FORECASTING THE ECONOMIC GROWTH IN

ROMANIA WITH THE COBB–DOUGLAS

PRODUCTION FUNCTION

Liliana DUGULEANĂ

1

Abstract: The Cobb-Douglas production function is an important analysis

tool which is used to characterize th e supply side of the Romanian economy

capacity, during 2000-2017, and to forecast the future tendency of economic

growth for the next two years. The study c omprises two approac hes of the

Romanian economy forecasting. One approach consists of building two

scenarios, one optimistic and another pessimistic, based on th e target

output of IMF experts’ opinions. We compared these scenarios of the results

for three sub-periods and for the entire analysed period. Another approach

was to compound the separate forecasts of factors. The results proved to be

consistent between the two approaches, as well as regarding the historical

data.

Key words: eco nomic growth, Cobb -Douglas production func tion, growth

decomposition, target output based forecasts; factor forecasts.

1. Introduction

The economic performance and output growth measurement have represented the

focus of many researchers and economists of national and international institutions,

well-known for their contributions in theorizing concepts in the economic practice

(Gălăţescu, et al. 2007; Strulik 2012, 2014; Stiglitz et al. 2009; Shahin 2012; Dowrick

1995; Andersen and Gruen 1995; Tanner 2014, 2017).

The technical progress is considered to be an exogenous factor which comprises not

only the technical innovative changes, but also the policy-induced changes, which can

affect the capital stock growth, mainly the changes in the investment/GDP ratio.

“The most empirical studies do not suggest macro-policies have much influence on

labour force growth” (Andersen and Gruen, 1995), although the role of

entrepreneurship on the Total Factor Productivity in the long run has been proved

(Erken et al. 2018).

The technical progress was similar during the development process for almost all the

1

Transilvania University of Braşov, ldugul@unitbv.ro

Bulletin of the Transilvania University of Braşov • Series V • Vol. 12 (61) No. 2 - 2019

158

countries. The growth differences between countries emphasize the exogenous

character of policies and economic decisions o f policy-makers, which have influenced

the economic growth, being also a measure of total factors’ productivity (Dowrick 1995).

The growth differences between countries are especially influenced by the initial

economic conditions, and more, by the initial level of productivity. These aspects of the

initial conditions even of endogenous nature are considered by Dowrick (1995) as semi-

exogenous. The subsequent growth is determined to a certain extent by the starting

point. The estimation of TFP was a m ain theme for researchers Gehringer, Martínez-

Zarzoso, and Nowak-Lehmann Danzinger (2014).

Measuring the stock of capital was an important subject, also the estimation based on

the perpetual inventory method – in many scientific research studies (Berlemann and

Wesselhöft 2014; Nehru and Dhareshwar 1993; Corrado et al. 2005; Scutaru et al. 2008).

2. Objectives

The purpose of this analysis was to make a forecasting for the Romanian economic

growth in 2018 and 2019, based on the quarterly historical data during 2000-2017.

Our analysis regarded the modalities of o btaining the forecasts, and the checking of

their consistency from a dynamic perspective.

Using the Cobb-Douglas production function for the decomposition method of the

factors' contributions to output growth allows a prospective overview on the economic

growth.

After applying the Cobb-Douglas function on the historical quarterly data of the

Romanian economy for three sub-periods identified during the period 2000 – 2017, we

used the Cobb-Douglas function to forecast the growth of the Romanian economy for

2018 and 2019.

The forecasting approaches are of two types: a target forecast based on IMF experts’

opinion and an independently established one, based on separate forecasts of factors

and their compounding in different scenarios.

The conclusions present the comparisons of the economic growth forecasts, including

the further directions of research and the limitations of the study.

3. Methodology of Research

3.1. The Cobb-Douglas production function, an analysis tool of the economy capacity

An important analysis tool of the supply drivers of economic growth is the growth

decomposition. The production function represents a tool which can summarize the

production constraint of an economy, i.e. the volume of goods and services that it is

able to produce. Trying to measure these two factors also offers us an im age of the

efficiency o f their use for obtaining the output: goods and services. The aspect

connected to the efficient use of the production factors is the Total Factor Productivity.