Page 48 - Azerbaijan State University of Economics

Hashim Al-Ali: An integrated macro-fiscal forecasting model and its application for
the Bangladesh economy

function relationships. It is well acknowledge in the modelling literature that the basic production

function adopted in most models is the constant elasticity of substitution (CES) function. This
basic framework however, and in most of the empirical literature on economic growth, is a

growth accounting approach which looks at the evolution of labour, capital and technological
progress and their contribution to overall growth.

The total factor productivity (TFP) growth, which is dependent on factors such as
technology, openness to international trade and institutional quality, has been introduced in this

modelling equation and calculated as a Solow’s residual [The Solow residual originated through the works of
Robert M. Solow, an American economist and recipient of the Nobel Memorial Prize in Economic Sciences (1987).The Solow
residual is a value that measures changes in productivity growth in a Solow growth model, which describes an entire economy's
production function. Productivity growth refers to rising output occurring with constant labor and capital input.]. However,
adjustment for the quality of the labour force (employment) and quality of the capital stock,

variables that reflect measure of educational and skills attainment and new investment quality
can be introduced in the production function formula. Hence, growth in output can be

decomposed into output per worker and contribution of growth by capital per worker. However,
this would reflect the contribution of the increase in education and the contribution of

improvements in new investment and technological progress. This could be added to the model’s

calculation when the right information is available, within the economy.
However, growth in total-factor productivity (TFP) represents output growth not accounted

for by the growth in inputs. Accordingly, it is a measure of the empirical productivity growth in

an industry (sector) or in a total economy over comparable time periods, such as from year to
year and decade to decade. The measure is deemed residual because its growth is not explained

by capital accumulation or any increase in labor.
Given the above aggregated production function structure, solution and the contribution of

labour and its productivity to the growth rate of the economy, we have modelled the labour
requirements and its productivity in the national economy of Bangladesh. Equations (14-20) of

the model have been structured and numerically solved to identify and obtain the employment,

the size of demand on labour, the labour and labour force supply, labour productivity,
productivity and labour growth rates and rate of the unemployment in the economy.

It is imperative to state that it is a fundamental development and growth alternative
strategy to rely on labour market factors, such as; productivity and employment growth to derive

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