Energy demand and the composition of output growth

Using the theory of the firm, the effects of unbalanced rates of output growth on aggregate energy demand are examined. Theoretical results show that failure to consider unbalanced growth leads to bias in aggregate price elasticity estimates. Empirically, differential output growth rates are important contributors to the overall growth of energy and other inputs; they can be as important as net price effects in explaining input growth. Unbalanced growth effects help to explain changes in labor's productivity growth and have increased in importance since the Arab oil embargo. They are quite significant relative to other sources of change during business cycle downturns.