In the last month’s record if output=Rs. 20000, human input=Rs.10000, material input=Rs.2000, capital input=Rs.1000, energy=Rs.500 and other expenses=Rs.1000, calculate total factor productivity.
Dear Dr. Parag Sen,,
In the simple and easy way for calculations, the following link may be useful
https://www.youtube.com/watch?v=jL7w90KC6G0
Regards
A comment. In the calculation of the total productivity factor it is necessary to differentiate the inputs that are transformed (through the activities of the process) into outputs and the resources (consumed, spent, depreciated) that are used to execute the process. As stated earlier, productivity is the relationship between the inputs and outputs of the process
In economics, total-factor productivity (TFP), also called multi-factor productivity, is usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs. Under some simplifications about the production technology, growth in TFP becomes the portion of growth in output not explained by growth in traditionally measured inputs of labour and capital used in production. TFP is calculated by dividing output by the weighted average of labour and capital input, with the standard weighting of 0.7 for labour and 0.3 for capital. Total factor productivity is a measure of economic efficiency and accounts for part of the differences in cross-country per-capita income.[2] The rate of TFP growth is calculated by subtracting growth rates of labor and capital inputs from the growth rate of output.
Total Factor Productivity (TFP) is often considered the primary contributor to GDP Growth Rate. While other contributing factors include labor inputs, human capital, and physical capital. Total factor productivity measures residual growth in total output of a firm, industry or national economy that cannot be explained by the accumulation of traditional inputs such as labor and capital. Since this cannot be measured directly the process of calculating derives TFP as the residual which accounts for effects on total output not caused by inputs.
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 in Gross Domestic Product (GDP) depends on supply of resources such as labour, capital, natural resources.
Many economists use production function approach to explain the importance of various factors for determining growth rate. The following type of production function has been used to measure the contributions of different factors to economic growth.
Let Y = AF (L, K, N)
where Y = Gross domestic product (GDP)
A = Total factor productivity
L = The quantity of labour input
K = The size of capital stock
N = The quantity of natural resources.
In the studies of sources of growth, the natural resources are taken as constant and human capital is added as a separate factor for determining growth in Gross Domestic Product. With these changes then the production function becomes
Y = AF (L,K,H)
where H represents the quantity of human capital.
An important way to assess the contribution of a resource to the production of goods and services is its productivity. By productivity we mean the ratio of output produced to the quantity of input used to produce it. We can measure productivity of a single factor such as labour or capital. To measure the productivity of all inputs together the concept of total factor productivity (TFP) is employed.
The total factor productivity means the ratio of output produced to the amount of all inputs used. Total factor productivity is index of overall productivity of the economy. In fact, technical progress in the economy is measured by the annual increase in total factor productivity.
Now, the economic growth depends on the increase in factor inputs and technological progress that is taking place in the economy. Improvement in technology makes factor inputs or resources more productive. If the quantity of resources is increasing and total factor productivity is rising, then output would grow faster than the increase in the quantity of resources.
Therefore, rate of economic growth achieved will depend on the growth in resources (i.e. factor inputs such as labour, capital and the rate of increase in total factor productivity. Thus
Economic growth = growth rate of supply of resources + rate of increase in total factor productivity
Now, the amount by which output increases due to the increase in labour input depends on the contribution of labour to it. Similarly, the amount by which output increases due to accumulation of capital depends on the contribution of capital to it.
Assuming no change in natural resources and taking two factor production function, then the growth in real output resulting from the increases in labour and capital inputs can be obtained from multiplying the increases in labour and capital by their respective contributions to the production of output.
Following the neoclassical economists such as Solow, and Meade the economists generally use the shares in national income (GDP) of labour and capital to measure their contributions to output. From the recent production function studies conducted for the US economy it has been found that labour’s share is about 70 per cent and capital’s share is about 30 per cent of national income. We can obtain the growth in output, (i.e. GDP) by using the following growth equation.
% ∆GDP = % ∆TFP + 0.70 (% ∆L) + 0.30 (% ∆K)
where
GDP = Gross Domestic Product
∆TFP = Change in total factor productivity
∆L = Increase in the quantity of labour
∆K = Increase in the capital stock
The above growth equation shows how growth in GDP depends on changes in total factor productivity (TFP) and changes in quantities of factors such as labour and capital. Recall that change in total factor productivity measures technological progress that is taking place in the economy.
Technical progress, that is, changes in total factor productivity is a crucial factor in determining growth of output. For example, if total factor productivity is increasing at the rate of 2 per cent per annum, then even with capital stock and labour force being held constant, gross domestic product (GDP) will increase at the rate of 2 per cent per annum.
If labour input increases by 2 per cent and capital stock increases by 3 per cent per annum each, then applying the above growth equation:
%∆GDP = 2 + 0.70 (2) + 0.30 (3)
= 2 + 1.40 + 0.90 = 4.3
Thus, GDP will grow at the rate of 4.3 per cent per annum.
It is worth noting here that higher growth rate achieved by Japan in the past was not only due to rapid growth rate of capital stock but also because of relatively higher growth rate in total factor productivity (TFP), that is, technological progress.
Further, from 1973 to mid nineties, lower growth rate in the United States has been due to slowdown in growth in total factor productivity. It may be further noted that differences in growth rates across countries can be explained in terms of differences in growth rates of capital stock and of total factor productivity.
The productivity formula is simple: Productivity = Output / Input
Another way to look at it is: Productivity = Value of Work / Hours Worked
Output can be measured in units, whereas value of work is typically measured in dollars. Input is most commonly measured in number of hours worked. However, different industries have different productivity benchmarks and use the formula in various ways.
Required Help in calculating the Total factor productivity
Dear all,
TFP is calculated by dividing output by the weighted average of labour and capital input, with the standard weighting of 0.7 for labour and 0.3 for capital.
,
As per the data available, The output variable considered in the study is Sales.
The inputs proxies are
1. Gross fixed asset (for capital),
2. employee salaries (for Labour),
3. power and electricity expenditures and
4. raw material expenditures.
one simple way to calculate TFP is
=sale/
(Gross fixed asset + employee salaries + power and electricity expenditures + raw material expenditures)
Another is
=sale/
(Wgt Avg. x Gross fixed asset + Wgt Avg. x employee salaries + Wgt Avg. x power and electricity expenditures + Wgt Avg. x raw material expenditures)
Wgt Avg.= Weighted average
If inputs are labour and capital only then I will take the standard weighting of 0.7 for labour and 0.3 for capital. but If I have four input used (as mentioned above) then
Q1. What will be the average weights of these four variables? Whether these weights are standardized and mentioned anywhere or I need to calculate it.
Q2. If this (weights) is to calculate then kindly let me know how to do that.
Thanks in advance
Total factor productivity (TFP) can be calculated by dividing the weighted average output of labor and capital input. Furthermore, it is a measure of economic progress and accounts as a part of differences in the cross country per capita income.
This is an official calculation sheet published by the World Bank. You can refer to this document about how TFP can be calculated at the global level.
https://openknowledge.worldbank.org/bitstream/handle/10986/31710/WPS8852.pdf?sequence=4&isAllowed=y
By far, this is the most comprehensive document I have found on the practical approach towards calculating TFP, using the World Bank Indicators database
Measurement without theory?
Total factor productivity (TFP) is an important concept which appears universally in growth and development studies. This question page that started three years ago has attracted to date more than 14,300 reads. This fact alone proves how TFP attracts keen interest of economists. However, TFP became target of many severe criticisms for the lack of theoretical contents.
TFP attracted wide interest when Solow (1957) showed that a substantial part of the American economic growth was explained by TFP, which Solow deemed a measure of technological change. Before that, Robinson (1953-54) started to criticize the concept of production functions and 1960’s there were a famous controversy often called capital theory controversy. Production function was criticized by Shaikh (1974) and Simon (1979), when the latter received Nobel Prize for Economic Sciences.
At the turn to the 21st century, TFP was scrutinized by various economists of different strands: Prescott (1997), Hultan (2001), Lipsey and Carlaw (2001), and Felipe and McCombie (2007). Abramovitz (1993), reflecting his long study of economic growth as historian, concluded that TFP shows our degree of ignorance. Subsequent to Felipe and McCombie (2003) and many other papers, the two published Felipe and McCombie (2013) that contains in its title a phrase from Wolfrang Pauli’s expression “Not even wrong”. It means that TFP and aggregate production function have no theoretical meanings and it is impossible to refute propositions that contain them.
I have given a quick look over the comments until now and find there are few critical comments. It reminded me a famous expression by Tjalling Koopmans (1947). I wonder whether people use TFP only because it gives measurement and talk about growth even if they cannot understand what it really means.
[References]
Abramovitz, Moses 1993 The Search for the Sources of Growth: Areas of Ignorance, Old and New. Journal of Economic History 53(2): 217-243.
Felipe, J., and Fisher, F.M. 2003 Aggregation in production functions: what applied economists should know. Metroeconomica 54(2-3): 208-263.
Felipe, J., and McCombie, J.S.L. 2007 Is a theory of total factor productivity really needed? Metroeconomica 58(1):195-229.
Felipe, J., and McCombie, J.S.L. 2013 The Aggregate production function and the measurement of technical change: 'Not even wrong'. Edward Elgar.
Hultan, Ch. R. 2001 Total factor productivity: a biography. Ch.1 (pp.1-54) in Hulten, Dean and Michael (eds.) New Developments in Productivity Analysis, University of Chicago Press.
Koopmans, Tjalling C. 1947 Measurement Without Theory. Review of Economics and Statistics 29(3): 161-172.
Lipsey, R.G., and Carlaw, K.I. 2001 What does total factor productivity measure? Study Paper Version 02. Simon Fraser University at Harbour Centre.
Prescott, Edward C. 1997 A Theory of Total Factor Productivity. Federal Reserve Bank of of Minneapolis Research Department Staff Report 242.
Robinson, Joan 1953-54 The Production Function and the Theory of Capital. Review of Economic Studies 21(2): 81-106.
Shaikh, A. 1974. Laws of algebra and laws of production: the humbug production function. Review of Economics and Statistics 51(1), 115-20.
Simon, Herbert A. 1979 On Parsimonious Explanations of Production Relations. Scandinavian Journal of Economics 81(4): 459-474.
Solow, R. 1957. Technical change and the aggregate production function. Review of Economics and Statistics 39, 31-20.
Total factor productivity (TFP) =output /input (labor+capital)
= 20000/(10000+1000)
= 1.818
You must put input ponderation because you are not sure that you use all them.
Mohammad Al-Bsheish
To what do you want to use the total factor productivity? Calculation is easy , but as Simon (1979) and others have shown, Cobb-Douglas (or CES) production functions are fake ones. They represent accounting identity as something that represent production relations (input-output relations). We should doubt all arguments based on TFP such as Solow-Swan growth theory and more refined Romer-Lucas endogenous growth theory.
- Badges
- Science topic
- Similar topics
- Social Psychology
- Attitude