As a company is looking for profits, it will certainly want to find a model that will bring more output with

less input. Hence, the total factor productivity, also known as multifactor productivity or Solow residual,
named after the American economist Robert Solow.

Total factor productivity (TFP) is the portion of output not explained by the number of inputs used in
production. As such, its level is determined by how efficiently and intensely the inputs are utilized in
production.

It does not measure the specific contributions of labor or capital, or any other factor of production.
Rather, total factor productivity is designed to measure the joint influences of technological change,
efficiency improvements, returns to scale, reallocation of resources, and other factors on economic
growth, allowing for the effects of capital and labor.

For example, investing in technology and education for a workforce can increase the TFP over time and
diminish costs.

TFP production function can be written as Y =f (K , L , A) where K and L represents capital and labor,
respectively. And A denotes multifactor productivity.

Yet, economists assume that competitive conditions exist in capital and labor markets and there are
constant returns to scale. If this is the case, then we can show that the growth rate of income is equal to
the growth rates of the capital and labor inputs weighted by their shares in national income. Hence, the
function can be written as g ( Y )=g ( K ) W ( K ) + g ( L ) W ( L ) + A :

Where g ( Y ) is the growth rate of income, g ( K ) is the growth rate of capital (investment), g ( L ) is the
growth rate of labor, and W ( K ) and W ( L ) are the weighted shares of capital and labor in the economy.

Suppose a country has a growth rate of income of 6%, a growth rate of capital (net of depreciation) of
10%, and capital’s chare of income is 30%, labor’s share is 70% and labor grows at 1%.

0.06= A+0.3 ( 0.10 )+ 0.7 ( 0.01 )

In this example, A=0.023 and technical progress accounts for just a little less than 40% of the output
growth of 6%.

Notice also that the growth in income will be raised if the investment rate is increased or if the labor
force increases more rapidly. Efficiency, meanwhile, is assumed to be unchanged.

Overall, gains in total factor production indicate growth in output that is not a result of using more
inputs. Rather, it is a measure of production efficiency. Understand total factor productivity growth
helps us understand how the nation can produce more without using more resources.
Total Factor Productivity is a measure of the physical output produced from the use of a given quantity
of inputs by the firm. When having multiple outputs and multiple inputs, the ratio of the weighted sum
of outputs with respect to the weighted sum of inputs is used to calculate the Total Factor Productivity.
In general, the weights are the cost share for inputs and the revenue shares for the outputs.

For example, investing in technology and education for a workforce can increase the TFP over time and
diminish costs.

There are many factors that impact a country’s productivity. Such things include investment in plant and
equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition.

The Solow residual, which is usually referred to as total factor productivity, measures the portion of an
economy’s output growth that cannot be attributed to the accumulation of capital and labor.

It is interpreted as the contribution to economic growth made by managerial, technological, strategic,

and financial innovations.

Also known as multi-factor productivity (MFP), this measure of economic performance compares the
number of goods and services produced to the number of combined inputs used to produce those goods
and services. Inputs can include labor, capital, energy, materials, and purchased services.