The Cobb-Douglas production function (CD) uses the country’s labor input and capital stock to estimate the total real economic output. The general form of the function is:

Y = AK^αL^β
Y = total real economic output
A = total factor productivity (TFP)
K = capital stock
L = labor input
α = output elasticity of K (0 < α < 1)
β = output elasticity of L (α + β = 1)

An assumption of the Cobb-Douglas production function is that economic growth and growth in corporate earnings are equal. In the short-term the two can be quite different, but over the long-term the assumption is reasonable. The Cobb-Douglas production function also assumes constant returns to scale. Thought of as efficiency, constant returns to scale implies that total factor productivity (TFP) remains constant (ΔTFP is zero). α and β are the output elasticities of capital and labor, respectively. The model assumes 0 < α < 1.0 and β = (1 – α) so that the sum of α and β is 1.0.