Total factor productivity

The Total factor productivity is a measure of productivity. It indicates which part of the growth of production can not be attributed to a growth in the utilization of factors of production (usually labor and capital), but as a kind of unexplained residual remains. It is advisable to accept as the cause for this part of the growth of the production outcome of technical progress.

Using the Solow growth accounting can economic growth, ie the growth of aggregate output Y as the sum of a growth contribution of the labor factor A, factor of production capital K and a remainder, the Solow residual, are divided. This residue is referred to as total factor productivity and can be viewed as a measure of technical progress.

Mathematically, the total differential of a Cobb -Douglas production function with constant returns to scale constituted ( that such a production function is present, is an assumption ) and then with respect to time. After division by Y is obtained as a result of the growth rate of output Y as the sum of the growth rates of the production factors labor A and capital K are each weighted by the marginal productivity of A and K (ie, the partial derivatives of Y with respect to A and K).

Assuming perfect competition in goods and factor markets, these marginal productivities correspond to the income shares of the production factors A and K, add up the to 1 ( or 100% ).

Are observable (in principle) the growth rates of Y, A and K, and the income shares of the factors of production of A and K. The Solow growth decomposition can therefore be tested empirically. Normally, it should be noted that the sum of the factors of production growth rates weighted by the income shares of the factors of production results in an output growth rate, which is smaller than the observed. The difference is the empirically determined total factor productivity, which can be as I said understood as a measure of technical progress.

The Cobb -Douglas production function with constant returns to scale is:

. logarithms:

. According to the time is derived, taking into account that

We obtain the Solow growth decomposition:

. The growth rate of Y is therefore the weighted sum of the growth rates of K and A. If the actual growth rates be observed, and when a and revenue share of K and (1 - a) of the revenue share of A is also known, this equation can be checked. It is not true in general, but it applies:

. where TFP is total factor productivity.

TFP as an explanation for the Asian miracle

The growth theory is structured growth in factor accumulation and changes in TFP. Order of 1960 to explain the enormous growth of the Asian tiger economies to the 90s, argue the World Bank ( 1993) and others with the help of estimates of TFP. They come to the conclusion that a significant part of Asian growth is based on the successful assimilation of Western technology and the further technical diffusion can be used as a potential opportunity for other developing countries ( = increase in TFP).

Criticism of the TFP concept

This view was challenged by Young and others in various empirical and theoretical work. Key points of criticism are the theoretical construction of the TFP and its empirical measurement. Young, Kim and Lau produce significantly different results, with the conclusion that the Asian economic growth is purely due to factor accumulation. TFP growth is not significant for Asia. Paul Krugman adds to the discussion adds another, historical, component. He draws parallels between the economic rise of the Asian Tigers with the rise of the Soviet Union. He warns against the fear that tigers could endanger your rise to prosperity in the industrialized countries and forecasts due to the nature of your business growth an early decline in growth. Since the late 90s, the discussion seems to rest. Young et al. have apparently prevailed with your criticism, although they could not win a "victory". The construct of the TFP and the macroeconomic base are increasingly being replaced by other more micro-economic approaches. A good summary can be found in Felipe ( 1997).