COBB-DOUGLAS PRODUCTION FUNCTION IN NORTH MACEDONIA: AN ARDL ANALYSIS
COBB-DOUGLAS PRODUCTION FUNCTION IN NORTH MACEDONIA: AN ARDL ANALYSIS

Summary/Abstract: This paper provides an empirical analysis of the aggregateproduction function in North Macedonia to assess the structural dynamics ofits economic growth and their implications for long-term sustainability. Uti-lizing quarterly data from 2005 to 2024, the paper estimates a Cobb-Douglasproduction function using the Autoregressive Distributed Lag (ARDL) boundstesting approach, a methodology selected for its robustness in handling vari-ables with mixed orders of integration I (0) and I (1).The primary objective is to decompose the sources of growth, specif-ically estimating the output elasticities of capital and labour and to test thehypothesis of Constant Returns to Scale (CRS). The empirical results confirmthe existence of a stable long-run cointegrating relationship. Crucially, theanalysis reveals that economic growth is driven predominantly by capital ac-cumulation, while the contribution of labour is statistically insignificant, high-lighting profound structural rigidities and skills mismatches. Furthermore, theWald test strongly rejects the hypothesis of CRS, indicating decreasing returnsto scale (α+β < 1). This identifies a critical vulnerability: the nation’s cur-rent trajectory is resource-intensive rather than productivity-led. The paperconcludes that achieving sustainable development requires a transition fromquantitative input expansion toward qualitative, Total Factor Productivity(TFP)-driven growth and circular economy integration to overcome the di-minishing marginal efficiency of the current model.

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