Australian industry is characterised by differences across firms, entry of new firms and exit of unsuccessful firms. These facts highlight the inappropriateness of measuring productivity using aggregate production functions based upon representative firms. In this study, we model heterogeneous firms which change over time. We model the interrelationship between productivity shocks, input choices and decisions to cease production. Firm-level data provides production function estimates for 25 two-digit Australian industries. A new aggregation method for industry-level data allows us to separate productivity changes from output composition changes. Our study sheds new light on the Australian productivity performance.