Total Factor Productivity
In economics, total-factor productivity (TFP), also called multi-factor productivity, is a variable which accounts for effects in total output not caused by traditionally measured inputs. 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.
TFP cannot be measured directly. Instead it is a residual, often called the Solow residual, which accounts for effects in total output not caused by inputs.
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 capital input share of contribution for K and L respectively). An increase in either A, K or L will lead to an increase in output. While capital and labor input are tangible, total-factor productivity appears to be more intangible as it can range from technology to knowledge of worker (human capital).
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.
Read more about Total Factor Productivity: Criticism, Estimation
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