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In [[economics]], '''total-factor productivity''' ('''TFP'''), also called ''multi-factor productivity'', is a variable which accounts for effects in total [[output (economics)|output]] not caused by traditionally measured inputs of labor and 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.

TFP cannot be measured directly. Instead it is a residual, often called the [[Solow residual]], which accounts for effects in total [[output (economics)|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).

<math>Y = A \times K^\alpha \times L^\beta </math>

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 economiesCitation needed.

It has been shown that there is a historical correlation between TFP and energy conversion efficiency.<ref name="Ayres-War 2002">{{ Cite journal
| last1 = Ayres
| last2 = Ayres
| last3 =Warr
| first1 = R. U.
| first2 = L. W.
| first3 =B.
| author1-link =
| title = Exergy, Power and Work in the U. S. Economy 1900-1998, Insead’s Center For the Management of Environmental Resources, 2002/52/EPS/CMER
| year = 2002
| url =http://terra2000.free.fr/downloads/expowork.pdf
| postscript = 
}}</ref>

== Criticism ==
[[Growth accounting]] exercises and Total Factor Productivity are open to the [[capital controversy|Cambridge Critique]]. Therefore, some economists believe that the method and its results are invalid.

On the basis of [[dimensional analysis]], TFP is criticized as not having meaningful [[units of measurement]].<ref>{{Harv | Barnett | 2007 | loc=p. 96}}</ref> The units of the quantities in the Cobb–Douglas equation are:
* ''Y:'' [[widgets]]/year (wid/yr)
* ''L:'' man-hours/year (manhr/yr)
* ''K:'' capital-hours/year (caphr/yr; this raises issues of heterogeneous capital)
* ''α, β:'' pure numbers (non-dimensional), due to being exponents
* ''A:'' (widgets * year''α'' + ''β'' – 1)/(caphr''α'' * manhr''β''), a balancing quantity, which is TFP.
The units of ''A'' do not admit a simple economic interpretation, and the concept of TFP is accordingly criticized as a modeling artifact.

== Estimation ==
As a residual, TFP is also dependent on estimates of the other components. A 2005 study<ref>{{Cite web|url=http://www.econ.wisc.edu/~aseshadr/working_pdf/humancapital.pdf|title=Human Capital and the Wealth of Nations| format=pdf| year=May 2006| accessdate=2 November 2006|ref=harv|postscript={{inconsistent citations}}}}</ref> on [[human capital]] attempted to correct for weaknesses in estimations of the labour component of the equation, by refining estimates of the quality of labour. Specifically, years of schooling is often taken as a proxy for the quality of labour (and stock of human capital), which does not account for differences in schooling between countries. Using these re-estimations, the contribution of TFP was substantially lower.

Robert Ayres and Benjamin Warr have found that the model can be improved by using the efficiency of energy conversion efficiency, which roughly tracks ''technological progress''.<ref name ="Ayres-Warr2004">{{ Cite journal
| last1 = Ayres
| last2 = Warr
| first1 = Robert U.
| first2 = Benjamin
| author1-link =
| title = Accounting for Growth: The Role of Physical Work
| year = 2004
| ref = harv
| url =http://www.iea.org/work/2004/eewp/Ayres-paper1.pdf
| postscript = 
}}</ref><ref name ="Ayres-Warr2006">{{ Cite journal
| last1 = Ayres
| last2 = Warr
| first1 = Robert U.
| first2 = Benjamin
| author1-link =
| title = Economic growth, technological progress and energy use in the U.S. over the last century: Identifying common trends and structural change in macroeconomic time series, INSEAD
| year = 2006
| ref = harv
| url = http://www.helsinki.fi/iehc2006/papers2/Warr.pdf
| postscript = 
}}</ref>

==See also==
* [[Solow residual]]
* [[Multifactor productivity]]
* [[Productivity model]]

==Further reading==

*{{cite book
|title=New Developments in Productivity Analysis: Chapter: Total Factor Productivity: A Short Biography; Sponsored by: National Bureau of Economic Research
|last1=Hulten
|first1=Charles R.
|last2=Dean
|first2= Edwin R.
|last3=Harper
|first3= Michael J.
|authorlink=
|coauthors=
|year= 2001|publisher =University of Chicago Press
|location=
|isbn=0-226-36062-8 |pages=1–54
|url=http://www.nber.org/chapters/c10122.pdf
|deadurl=no |accessdate=22 October 2013 | postscript = <Chapter by Charles Hulten>}}

==References==
{{Reflist}}
{{refbegin}}
*{{Cite journal
| title = Dimensions and Economics: Some Problems
| author = William Barnett II
| year = 2007
| volume = 7
| issue = 1
| journal = [[Quarterly Journal of Austrian Economics]]
| url = http://mises.org/journals/qjae/pdf/qjae7_1_10.pdf
| ref = harv
| postscript = {{inconsistent citations}}
}}
{{refend}}

[[Category:Production economics]]

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