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Total factor productivity


In economics, total-factor productivity (TFP), also called multi-factor productivity, is a variable which accounts for effects in total output growth relative to the growth in traditionally measured inputs of labor and capital. TFP is calculated by dividing output by the weighted average of labor and capital input, with the standard weighting of 0.7 for labor and 0.3 for capital. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economy’s long-term technological change or technological dynamism.

The equation below (in Cobb–Douglas form) represents total output (Y) as a function of total-factor productivity (A), capital input (K), labor input (L), and the two inputs' respective shares of output (α and β are the share of contribution for K and L respectively). An increase in either A, K or L will lead to an increase in output.

Technology growth and efficiency are regarded as two of the biggest sub-sections of Total Factor Productivity, the former possessing "special" inherent features such as positive externalities and non-rivalness which enhance its position as a driver of economic growth.

Total Factor Productivity is often seen as the real driver of growth within an economy and studies reveal that whilst labour and investment are important contributors, Total Factor Productivity may account for up to 60% of growth within economies.

It has been shown that there is a historical correlation between TFP and energy conversion efficiency. Also, it has been found that integration (among firms for example) has a casual positive impact on total factor productivity.

Growth accounting exercises and Total Factor Productivity are open to the Cambridge Critique. Therefore, some economists believe that the method and its results are invalid.


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