Calculating Total Factor Productivity and Substitution Elasticities in the Manufacturing Sector in Iran

Abstract

The main aim of this paper is to estimate updated and accurate measurement of total factor productivity (TFP), price and substitution elasticities in the manufacturing sector in Iran over the period 1974-2013 by using a locally flexible normalized quadratic (NQ) functional form. Substitution elasticities indices are estimated in two scenarios: the first, interfactor substitution index and the second, interfuel substitution index. Empirical results show that the average TFP indices are 0.32% and 0.62% in the first and second scenario respectively. The results also show that all inputs based on the cost elasticities are normal goods, and the Allen own-elasticities of substitution for the different inputs are negative in the both scenarios. Moreover, the Morishima interfactor and interfuel elasticities of substitution are positive and less than one, except in one case. The results highlight the fact that the substitution between different inputs and fuels has been quite restricted.

Keywords

• tfp
• substitution elasticities
• flexible normalized quadratic (nq) functional form