TOTAL FACTOR PRODUCTIVITY Meaning and
Definition
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Total factor productivity (TFP) is an economic term and measure that reflects the overall efficiency and effectiveness of an economy or industry in transforming inputs into outputs. It represents the portion of economic output that cannot be explained by the amount of inputs utilized in the production process.
TFP considers the combined impact of all factors of production (such as labor, capital, and technological advancements) on the overall productivity and output of an economy or industry. It measures the efficiency with which inputs are used and the ability to achieve higher levels of output without necessarily increasing inputs proportionally.
TFP is calculated by dividing the index of output by the aggregate index of inputs, which provides an overall measure of productivity growth. A higher TFP implies that an economy or industry is producing more output with the same amount of inputs or producing the same output with fewer inputs, indicating higher efficiency and productivity.
Factors that can contribute to changes in TFP include technological advancements, improvements in management practices, changes in product quality, and advances in knowledge and skills of the workforce. These factors can lead to an increase or decrease in TFP, ultimately impacting an economy or industry's overall productivity and competitiveness.
TFP is an important indicator used by economists and policymakers to assess the growth and productivity trends of an economy or industry, and to identify areas for improvement and policy interventions to promote increased efficiency and productivity.
