The Contribution of Reallocation to U.S. GDP Growth: Measurement Using Tiered Aggregation

Resources moving from less productive to more productive sectors can increase aggregate output without any underlying change in production technology, yet the impact of these reallocations is challenging to measure because it involves measuring unobserved counterfactual production where resources have not moved. We construct measures of counterfactual production by implementing an Industry-Level Production Account with a tiers structure. Aggregate gross domestic product (GDP) and total factor productivity growth constructed bottom-up from the micro- (industry) level captures the true data-generating process for the sources of growth. The counterfactual accounts employ restrictions that impose a constraint that reallocating outputs and inputs have no impact on aggregate production, so that the difference between the two measures captures the economic impact of reallocations. We find that reallocations contributed 0.30 percent per year on average out of total GDP growth of 2.39 percent per year from 1987–2018. Almost all of this can be accounted for as reallocations of value added within manufacturing (for example, to the computer producing sector from other manufacturing sectors) and across sectors to the information and trade sectors.