Testing the Existence of Cobb-Douglas and CES Production Functions in Nigeria

Following the numerous arguments for and against the production functions, this research work tries to find out if the production functions, particularly the Cobb-Douglas and Constant Elasticity of Substitution (CES) production functions holds for Nigeria using an annual time series data from 1970-2012. The Cobb-Douglas and CES production functions which are originally non-linear were linearized and the Ordinary Least Square (OLS) methodology was used. This study also carried out Error Correction Models for each of the production functions in order to know how disequilibrium in output adjusts in the short run for both production functions. It was discovered that both production functions are suitable for the Nigeria economy. The Cobb-Douglas as well as constant elasticity of substitution production function exhibit increasing returns to scale. The results also showed that labour contributes more to output than capital does. Again, for both production functions their error correction models showed that a greater fraction of disequilibrium in output is adjusted in the short run. For the error correction model for Cobb-Douglas it was shown that 87% of disequilibrium in output is adjusted in a year while that for constant elasticity of substitution production function showed 88% of disequilibrium in output is adjusted in a year. The study therefore concludes that the Cobb-Douglas and constant elasticity of substitution production functions are appropriate for the Nigerian economy. The study recommends that both production functions can be used to make forecast in Nigeria.