The Advantages Of The Economic Definition Of Economic Productivity

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TFP is the essence of economic notion of productivity and is used as a measure of technical progress. It shows the efficiency with which all inputs are used in a production function and is defined as the measure of increase in output not due to different input choices but due to increase in marginal products of factors of production.

TFP= %∆ in total output – α* %∆ in capital – (1-α)* %∆ in labour engaged

TFP measurement helps unravel the direct growth contributions of labour, capital, intermediate inputs and technology. This is an important tool for reviewing past growth patterns and for assessing the potential for future economic growth.

Total factor productivity tries to capture the efficiency with which inputs of capital as well as labour are used. If workers are given better machines and equipment, this will automatically boost output per man-hour, even if there is no gain in overall economic efficiency once the extra capital spending is taken into account.
Investors should look at total factor productivity
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Amongst its functional form (the formula) this method holds a heavy advantage i.e., it does not need to refer to a particular kind of production function. Thus it is not dependent on the unrealistic assumptions on which total factor productivity is based. Furthermore, to quantify labour productivity one has not to rely on the distributive shares in output, which are strongly influenced by market power, and such a measure of productivity encompasses all kinds of technical change – embodied and disembodied (Reatti, 2001). The relative influence of these two types of technical change can be measured separately by splitting the formula of productivity of labour into its components − the degree of mechanisation (the capital/labour ratio), and the ‘productivity of
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