To get parameter values for the CES production function, we calibrate as in applied general equilibrium modelling. The elasticity of substitution parameters a crucial role in calibration exercises; usually these are acquired through estimation or with some estimates (prior knowledge or outside information). We vary the elasticity parameters between a low value of 0.5 and a high 2.5, across the industries, and assume that these parameters do not change over time. The nested production function can be split into Cobb-Douglas function of capital and composite labour, and a CES labour composite of skilled and unskilled labour: The profit maximizing behaviour of the producer in a Cobb-Douglas production function yields the share parameters. Given the information on the sector-wise output, capital, total labour, skilled and unskilled labour, at the observed period, we calibrate parameters , and for both the beginning and end years. 4. Results We run two scenarios, with the elasticity of substitution between skilled and unskilled labour low or high. In case of a lower elasticity of substitution, the analysis shows that the Indian economy operated at 88 and 49 percent of its potential in the respective years of 1994 and 2002 (see Table 2). In case of a higher elasticity of substitution, the economy operated at 90 and 47 percent in 1994 and 2002, respectively. It is worth mentioning here that in our model 1994 is considered to be static efficiency and 2002 dynamic. Possibility of education and investment process creates substantial potential for the economy in 2002. Introduction of
To get parameter values for the CES production function, we calibrate as in applied general equilibrium modelling. The elasticity of substitution parameters a crucial role in calibration exercises; usually these are acquired through estimation or with some estimates (prior knowledge or outside information). We vary the elasticity parameters between a low value of 0.5 and a high 2.5, across the industries, and assume that these parameters do not change over time. The nested production function can be split into Cobb-Douglas function of capital and composite labour, and a CES labour composite of skilled and unskilled labour: The profit maximizing behaviour of the producer in a Cobb-Douglas production function yields the share parameters. Given the information on the sector-wise output, capital, total labour, skilled and unskilled labour, at the observed period, we calibrate parameters , and for both the beginning and end years. 4. Results We run two scenarios, with the elasticity of substitution between skilled and unskilled labour low or high. In case of a lower elasticity of substitution, the analysis shows that the Indian economy operated at 88 and 49 percent of its potential in the respective years of 1994 and 2002 (see Table 2). In case of a higher elasticity of substitution, the economy operated at 90 and 47 percent in 1994 and 2002, respectively. It is worth mentioning here that in our model 1994 is considered to be static efficiency and 2002 dynamic. Possibility of education and investment process creates substantial potential for the economy in 2002. Introduction of
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