total factor productivity

Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. The following definition describes the measurement and importance of TFP for growth, fluctuations and development as well as likely future directions of research. Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production. As such, its level is determined by how efficiently and intensely the inputs are utilized in production. TFP growth is usually measured by the Solow residual. Let gY denote the growth rate of aggregate output, gK the growth rate of aggregate capital, gL the growth rate of aggregate labor and alpha the capital share. The Solow residual is then defined as gY − α ∗ gK − (1− α) ∗ gL. The Solow residual accurately measures TFP growth if (i) the production function is neoclassical, (ii) there is perfect competition in factor markets, and (iii) the growth rates of the inputs are measured accurately. TFP plays a critical role on economic fluctuations, economic growth and cross-countr