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No. WP01/2010

DPIN Version 1.0: A Program for Decomposing Productivity Index Numbers

C.J. ODonnell

Date: March 2010

School of Economics

University of Queensland

St. Lucia, Qld. 4072

Australia

ISSN No. 1932 - 4398

DPINVERSION1.0:APROGRAMFORDECOMPOSINGPRODUCTIVITYINDEXNUMBERS

by

C.J.ODonnell

DPIN Version 1.0 is a fast userfriendly program for computing and Decomposing Productivity Index Numbers. The

program uses the conceptual framework developed by O'Donnell (2008) and the data envelopment analysis (DEA)

programsdevelopedbyO'Donnell(2009).Thispaperdescribestheconceptualframeworkandthemainfeaturesofthe

software.

1.TOTALFACTORPRODUCTIVITYINDEXES

1

that uses a single input to produce a single output, productivity is usually measured as the

outputinput ratio. In the more general case of a firm that produces several outputs using several inputs, it is

commontomeasuretotalfactorproductivity(TFP)astheratioanaggregateoutputtoanaggregateinput.Several

methods for computing these aggregates are described by O'Donnell (2008). Let Q

t

and X

t

denote the aggregate

outputandinputofafirminperiodt.ThentheTFPofthefirminthatperiodissimply

(1) = .

t

t

t

Q

TFP

X

TheassociatedindexnumberthatmeasurestheTFPofafirminperiodtrelativetoitsTFPinperiod0is:

(2)

0

0

0 0 0 0

/

/

= = =

t t t t

t

t

TFP Q X Q

TFP

TFP Q X X

where

0 0

/ =

t t

Q Q Q isanisanoutputquantityindexand

0 0

/ =

t t

X X X isaninputquantityindex.Thus,TFPgrowth

canbeviewedasameasureofoutputgrowthdividedbyameasureofinputgrowth.

AnyTFPindexthatcanbeexpressedintermsofaggregatequantitiesasinequation(2)issaidtobemultiplicatively

complete (ODonnell, 2008). The class of multiplicativelycomplete TFP indexes includes the wellknown Paasche,

Laspeyres, Fisher, Tornquist and HicksMoorsteen TFP indexes. Of these, only the HicksMoorsteen index can be

computedwithoutpricedata(allthatisrequiredisdataonquantities).AnotherTFPindexthatcanbecomputed

withoutpricedataistheMalmquistTFPindexofCaves,ChristensenandDiewert(1982).However,theMalmquist

TFP index is not multiplicativelycomplete and cannot, except in restrictive special cases, be regarded as a valid

measureofproductivitychange.TheDPINsoftwarecomputestheHicksMoorsteenTFPindex.

2.THECOMPONENTSOFPRODUCTIVITYCHANGE

O'Donnell(2008)demonstratesthatallmultiplicativelycompleteTFPindexescanbedecomposedintoameasureof

technicalchangeandseveralmeasuresofefficiencychange.Figure1illustratesthebasicideainaggregatequantity

space. In this figure, the TFP of a firm in period 0 is given by the slope of the ray passing through the origin and

point A, while the TFP of the firm in period t is given by the slope of the ray passing the origin and point Z. Let

lowercase a and z denote the angles between the horizontal axis and the rays passing through points A and Z.

Then the TFP index that measures the change in TFP between the two periods can be compactly written

0

tan / tan . =

t

TFP z a ThisabilitytowriteamultiplicativelycompleteTFPindexastheratioof(tangent)functionsof

anglesinaggregatequantityspaceisusedbyO'Donnell(2008)toconceptualiseseveralalternativedecompositions

of TFP change. For example, let tan e denote the TFP at any nonnegative point E. Then it is clear, both

mathematically and from Figure 1, that the change in the TFP of the firm between periods 0 and t can be

decomposedas

0

(tan / tan )(tan / tan ). =

t

TFP z e e a

1

`Firm'isagenerictermusedtorefertoanindividual,firm,business,state,countryoranyotherdecisionmakingunit.

2

Figure1. MeasuringandDecomposingTFPChange

Within this framework, a potentially infinite number of points E can be used to effect a decomposition of a

multiplicativelycomplete TFP index. O'Donnell (2008) focuses on those points that feature in measures of

efficiencythatarecommonintheeconomicsliterature.Expressedintermsofaggregatequantities,theefficiency

measuresthatfeatureprominentlyininputorienteddecompositionsofTFPchangeare:

- Inputoriented Technical Efficiency (ITE) which measures the difference between observed TFP and the

maximumTFPthatisispossiblewhileholdingtheinputmix,outputmixandoutputlevelfixed.Thisconceptis

illustrated in Figure 2, where the curve passing through points B and D is the frontier of a mixrestricted

productionpossibilitiesset.Theproductionpossibilitiessetismixrestrictedinthesensethatitonlycontains

(aggregates)ofinputandoutputvectorsthatcanbewrittenasscalarmultiplesoftheinputandoutputvectors

at point A. ITE is a ratio measure of the horizontal distance from point A to point B. Equivalently, it is a

measureofthedifferenceinTFPatpointsAandB:

0

tan / tan . = ITE a b

- InputorientedScaleEfficiency(ISE)whichmeasuresthedifferencebetweenTFPatatechnicallyefficientpoint

andthemaximumTFPthatispossiblewhileholdingtheinputandoutputmixesfixed(butallowingthelevels

to vary). This measure of efficiency is represented in Figure 2 as a movement from point B to point D:

0

tan / tan . ISE b d = O'Donnell(2008)referstopointDasthepointofmixinvariantoptimalscale(MIOS).

- Residual Mix Efficiency (RME) which measures the difference between TFP at a point on a mixrestricted

frontier andthe maximum TFP possible when input and output mixes (and levels) canvary. This measure of

efficiency is represented in Figure 2 as a movement from point D to point E:

0

tan / tan . RME d e = The curve

passingthroughEisthefrontierofanunrestrictedproductionpossibilitiesset(unrestrictedinthesensethat

therearenorestrictionsoninputoroutputmix). Theuseofthetermmixinthis contextisselfevident

themovementfrompointDtopointEisamovementfromanoptimalpointonamixrestrictedfrontiertoan

optimal point on a mixunrestricted frontier, so the difference in TFP is essentially a mixeffect. O'Donnell

(2008)alsousesthetermresidualherebecausei)thismovementmayalsoinvolveachangeinscaleandii)

when comparing TFP at point A with TFP at the point of maximum productivity (point E), RME is the

componentthatremainsafteraccountingforpuretechnicalandscaleefficiencyeffects.

A

Aggregate

Output

0

0

X

E

0

Q

e

t

Q

t

X

Z

z

a

= =

= =

= = =

0 0 0

0

0

/ tan

/ tan

tan tan tan

tan tan tan

t t t

t

t

TFP Q X a

TFP Q X z

TFP z z e

TFP

TFP a e a

Aggregate

Input

3

Figure2. AnInputOrientedDecompositionofTFPEfficiency

- InputorientedMixEfficiency(IME)whichmeasuresthedifferencebetweenTFPatatechnicallyefficientpoint

onthemixrestrictedfrontierandthemaximumTFPthatispossiblewhileholdingtheoutputlevelfixed.This

measureofefficiencyisrepresentedinFigure2asamovementfrompointBtopointU: =

0

tan / tan . IME b u

- ResidualInputorientedScaleEfficiency(RISE)whichmeasuresthedifferencebetweenTFPatatechnicallyand

mixefficient point and TFP at the point of maximum productivity. The term scale is used because any

movementaroundanunrestrictedproductionfrontierisamovementfromonemixefficientpointtoanother,

soanyimprovementinTFPisessentiallyascaleeffect.However,thetermresidualisalsousedbecause,even

thoughallthepointsontheunrestrictedfrontieraremixefficient,theymayneverthelesshavedifferentinput

and output mixes. Thus, what is essentially a measure of scale efficiency may contain a residual mix effect.

The term residual is also appropriate in the sense that if we are interested in decomposing the difference

between TFP at the observed point A and TFP at the point of maximum productivity E, then residual scale

efficiency isthe component that remains after we have accounted forpure technical andpure mix efficiency

effects. This measure of efficiency is represented in Figure 2 as a movement from point B to point U:

=

0

tan / tan . RISE u e

- TFP Efficiency (TFPE) which measures the difference between observed TFP and the maximum TFP possible

using the available technology. This measure of efficiency is represented in Figure 2 as a movement all the

wayfrompointAtopointE:

*

0 0 0

/ tan / tan = = TFPE TFP TFP a e where

*

0

TFP denotesthemaximumTFPpossible

usingthetechnologyavailableinperiod0.

Figure2illustratestwoofmanypathwaysfromAtoEandthereforetwoofmanydecompositionsofTFPefficiency:

(3)

0

0 0 0 0

0

*

TFP

TFPE ITE ISE RME

TFP

= =

(4)

0

0 0 0 0

0

= =

*

TFP

TFPE ITE IME RISE

TFP

A

Aggregate

Output

0

0

X

E

0

Q

e

B

u a

0 0 0 0

= = =

tan

t

tan

t

ta

an

n

ta

tan

a an t n n

a

I

a b

IS

d

RME

e

TFP E E

e

TE

d b

0 0 0 0

= = =

tan

t

tan

tan

tan

tan

t n

t an

a

an

u a b

IM

a

T E FPE ITE

b e e

RISE

u

D

b

U

d

Aggregate

Input

4

O'Donnell(2008)alsopresentsseveraloutputorienteddecompositionsofTFPefficiencyintermsofpathwaysfrom

point A to point E. Such decompositions provide a basis for an output or inputoriented decomposition of any

multiplicativelycompleteTFPindex.Theeasiestwaytoseethisistorewrite(3)as

*

0 0 0 0 0

. TFP TFP ITE ISE RME =

Asimilarequationholdsforthefirminperiodt: =

*

.

t t t t t

TFP TFP ITE ISE RME Itfollowsthat

(5)

*

0 *

0 0 0 0 0

t t t t t

t

TFP TFP ITE ISE RME

TFP

TFP TFP ITE ISE RME

| | | |

= =

| |

\ . \ .

Thefirstterminparenthesesontherighthandsideofequation(4)measuresthedifferencebetweenthemaximum

TFP possible using the technology available in period t and the maximum TFP possible using the technology

available in period 0. Thus, it is a natural measure of technical change. The economy/industry experiences

technicalprogressorregressasthistermisgreaterthanorlessthan1.Theotherratiosontherighthandsideof

(5) are measures of technical efficiency change, scale efficiency change, and residual mix efficiency change.

O'Donnell (2008) derives the outputoriented counterparts to equations (3) and (4) and demonstrates that the

inputandoutputorientedmeasuresoftechnicalchangeareplausiblyidentical.DPINcomputesthecomponents

of(5)togetherwiththecomponentsofthefollowingalternativedecompositionsofTFPchange:

(6)

| | | |

= =

| |

\ . \ .

*

0 *

0 0 0 0 0

t t t t t

t

TFP TFP ITE IME RISE

TFP

TFP TFP ITE IME RISE

(7)

| | | |

= =

| |

\ . \ .

*

0 *

0 0 0 0 0

t t t t t

t

TFP TFP OTE OSE RME

TFP

TFP TFP OTE OSE RME

(8)

| | | |

= =

| |

\ . \ .

*

0 *

0 0 0 0 0

t t t t t

t

TFP TFP OTE OME ROSE

TFP

TFP TFP OTE OME ROSE

whereOTE,OSE,OMEandROSEareoutputorientedmeasuresoftechnical,scale,mixandresidualscaleefficiency

thatareanalogoustotheinputorientedmeasures.

3.THEDPINSOFTWARE

The DPIN software uses the DEA programs developed by O'Donnell (2009) to compute and decompose the Hicks

MoorsteenTFPindex.Themethodologyandthesoftwarecanbeused

- whennopricedataisavailable(i.e.,whenonlyinputandoutputquantitydataisavailable);

- for firms that operate in any market environment (e.g., regulated industries, perfectly competitive

industries);

- forfirmsthathaveanybehaviouralobjective(e.g.,maximiseprofit,maximiseoutput);

- whenthetechnologyexhibitsconstantorvariablereturnstoscale;and

- toeitherallowfortechnicalregressorprohibittechnicalregress.

Twoversionsofthesoftwareareavailable:

- astandard(free)versionwhichisavailableathttp://www.uq.edu.au/economics/cepa/dpin.htm.The

standardversioncananalyseabalancedpanelcomprisingnomorethan45firmsandnomorethan350

observations(i.e.,firmsxperiods).

- aprofessional(commercial)versionthatcanbeobtainedbycontactingc.odonnell@economics.uq.edu.au.

Theprofessionalversioncananalyseabalancedpanelwithnolimitonthenumbersoffirmsor

observations.

5

The program was written

2

in C++ and compiled using the mingw compiler within the DevC++ integrated

development environment (IDE). The program is designed to run on a Windows XP or Vista platform. Installing

DPINinvolvesextractingthefilesinDPIN.zipintoanydirectory.DPIN.zipcontainsthefollowingfiles:

DPIN.exe theexecutablefile

DPINTermsandConditions.pdf disclaimer

DPINUsersGuide.pdf thisdocument

eg1_input.csv anexampleinputfile(seebelow)

eg2_input.csv asecondexampleinputfile(seebelow)

rice_input.csv aninputfiletoanalysethericedatainCoellietal.(2005).

RunningDPINinvolvestwosteps:creatinganinputfileandrunningtheexecutablefile.

CreatingtheDPINInputFile

DPINinputfilesmustbecreatedwithinMicrosoftEXCELandsavedina.csv(commadelimited)format.Theinput

file contains both commands and data. To illustrate, Figure 1 is a screenshot of the file eg1_input.csv required to

runthenumericalexampleinO'Donnell(2008).Therowsbeforetheendcommandarecommandrows;therow

immediatelyaftertheendcommandisaheaderrow;theremainingrowsaredatarows.DPINwillreadthetext

anddataincolumnsAandBofeveryrowuntilitencountersanendcommand.Itwillthenskiptheendcommand

andtheheaderrowandstartreadingthedata.Theprogramiscasesensitiveandwillonlyrecognisethefollowing

textstringsinthecommandrows:

Periods tospecifythenumberofperiods

Firms tospecifythenumberoffirms

Inputs tospecifythenumberofinputs

Outputs tospecifythenumberofoutputs

NoTechRegress toprohibittechnicalregress(optional)

CRS toimposeconstantreturnstoscale(optional)

The command rows can be listed in any order (e.g., the number of outputs can be specified first, second, or last).

Theprogramwillnotreadthetextintheheaderrowthisrowissimplyusedtoconvenientlyrecordthenamesof

theoutputsandinputs.Theoutputandinputdatamustbestoredinthedatarowsinaparticularformat:

- thefirstoutputvariablemustbestoredincolumnD

- alloutputvariablesmustbestoredtotheleftoftheinputvariables;

- thedatamustbeabalancedpanel;

- thedatamustbesortedfirstbyperiodandthenbyfirm;

- theobservation,firmandperiodidentifiersincolumnsA,BandCmustbenumeric(e.g.,1,2,...,not

Jan,Feb...);and

- to avoid numerical problems it is advisable to normalise all output and input variables to have unit

means.

The DPIN default settings are to allow for technical regress and variable returns to scale. To prevent technical

regress, insert a command row with NoTechRegress in column A. To impose constant returns to scale, insert a

commandrowwithCRSincolumnA.Figure2isascreenshotoftheinputfileusedtobothpreventtechnicalregress

andimposeconstantreturnstoscale.

RunningtheExecutableFile

The DPIN executable file is DPIN.exe. Doubleclicking DPIN.exe will open windows similar to those depicted in

Figures3to5.Figure3isacommandwindowthatreportsprogramandruntimeinformation;Figure4isawindow

usedtobrowseandselecttheinputfile;andFigure5isthecommandwindowasitappearsshortlyaftertheinput

fileeg1_input.csvhasbeenselected.ResultsarewrittentoEXCELoutputfileshavingextensions_output.csv.The

2

TheDPINprogramwasoriginallywritteninGAUSSbyC.ODonnellandwastranslatedintoC++byF.WrathmallandC.ODonnell.

6

name assigned by DPIN to the output file is reported in the command window prior to exit. In the professional

versionofDPIN,distancesarewrittentofileshavingextensions_distances.csv.

RuntimeErrors

In both versions of DPIN, error diagnostics are written to log files having extensions _log.txt. In log files (and the

commandwindow)thegeneralerrorcodeforfailuretosolvealinearprogramis1.ODonnell(2009)explainswhy

some linear programs may be infeasible and fail to solve. The error code for exceeding the maximum number of

simplexiterationsis5.Themaximumnumberofiterationsmaybereachedifthelinearprogramisdegenerate.For

detailsondegeneracyandcyclinginlinearprogramsseeWinston(2004,p.168171).

InterpretingtheDPINOutput

DPIN computes and reports measures of output and inputoriented technical, scale and mix efficiency for every

firm in every time period in the sample. It also computes and reports indexes of TFP change, technical efficiency

change,andoutputandinputorientedmeasuresoftechnical,scaleandmixefficiencychange.Toillustrate,Figure

6 presents the output file eg1_output.csv obtained by running DPIN on the input file eg1_input.csv. For an

interpretationoftheseresults,seeO'Donnell(2009,p.20,21,34,35).NotethatColumnKintheoutputfilereports

newpointsofmaximumproductivity.IftechnicalregressisprohibitedandthereisnoMaxTFPvaluereportedfora

particularperiodthenthisisbecausethepointofmaximumproductivityisunchangedfromthepreviousperiod.In

suchcases,theindexoftechnicalchangeis1.Themissingvaluecodeusedinoutputfilesis9999.Missingvalues

occurwhenalinearprogramcannotbesolved.

FurtherInformation

Forfurtherinformation,emailc.odonnell@economics.uq.edu.au

7

Figure1.InputfileforaModelthatPermitsTechnical

RegressandAssumesVRS.

Figure2.InputfileforaModelthatProhibits

TechnicalRegressandAssumesCRS.

8

Figure3.InitialCommandWindow

Figure4.InputFileSelectionWindow

Figure5.CommandWindowafterDataProcessing

Figure6.OutputFile

References

Caves, D. W., L. R. Christensen and W. E. Diewert (1982). "The Economic Theory of Index Numbers and the

MeasurementofInput,Output,andProductivity."Econometrica50(6):13931414.

Coelli,T.J.,D.S.P.Rao,C.J.O'DonnellandG.E.Battese(2005).AnIntroductiontoEfficiencyandProductivityAnalysis.

NewYork,Springer.

O'Donnell, C. J. (2008). An Aggregate QuantityPrice Framework for Measuring and Decomposing Productivity and

ProfitabilityChange.CentreforEfficiencyandProductivityAnalysisWorkingPapers.UniversityofQueensland.

O'Donnell, C. J. (2009). Measuring and Decomposing Agricultural Productivity and Profitability Change. 53rd Annual

ConferenceoftheAustralianAgriculturalandResourceEconomicsSociety.Cairns,Australia.

Winston,W.L.(2004).OperationsResearch:ApplicationsandAlgorithms.BelmontCA,BrooksCole.

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