Intermediate goods and total factor productivity

The share of intermediate goods in gross output has declined in the U.S. over the 1958-2004 period. I present a model of gross output production in which the intermediate goods share (IGS) in gross output appears as an explicit part of total factor productivity (TFP) in the value added production function. In particular, a larger IGS implies a smaller TFP level. Therefore, the decline in the IGS can contribute to the observed TFP growth in the U.S. during the period considered. A simple growth accounting exercise shows that when the production function for gross output is Cobb-Douglas in capital, labor and intermediate goods, the IGS accounts for at least 1/4 of TFP growth. With a CES gross output production function, the IGS accounts for up to 61% of TFP growth. Using this accounting procedure, I also find that intermediate goods are responsible for the most part of the productivity slowdown occurred during the seventies.