On Measurement of Efficiency of Cobb-Douglas Production Function with Additive and Multiplicative Errors

Abstract

In developing counties, efficiency of economic development has determined by the analysis of industrial production. An examination of the characteristic of industrial sector is an essential aspect of growth studies. The most of the developed countries are highly industrialized as they brief “The more industrialization, the more development”. For proper industrialization and industrial development we have to study industrial input-output relationship that leads to production analysis. For a number of reasons econometrician’s belief that industrial production is the most important component of economic development because, if domestic industrial production increases, GDP will increase, if elasticity of labor is higher, implement rates will increase and investment will increase if elasticity of capital is higher. In this regard, this paper should be helpful in suggesting the most suitable Cobb-Douglas production function to forecast the production process for some selected manufacturing industries of developing countries like Bangladesh. This paper choose the appropriate Cobb-Douglas function which gives optimal combination of inputs, that is, the combination that enables it to produce the desired level of output with minimum cost and hence with maximum profitability for some selected manufacturing industries of Bangladesh over the period 1978-79 to 2011-2012. The estimated results shows that the estimates of both capital and labor elasticity of Cobb-Douglas production function with additive errors are more efficient than those estimates of Cobb-Douglas production function with multiplicative errors.