Total Factor Productivity
Bilal Perwaiz

Total-factor productivity, also known as multi-factor productivity is a variable that changes over time and essentially attempts to explain the effects in total output not normally measured or explained by inputs. Total factor productivity is imperative in explaining growth mechanisms such as technological change and such over an extended period of time. If all the inputs are accounted for in an output functions, total factor productivity is said to be a substantial measure of long-term technological change of an economy. When explaining total factor productivity there is no direct method to measure it definitively, rather it is more commonly known as “Solow residual” which measures effect in total output not caused by inputs.
Traditionally, the following equation can be used to explain total factor productivity in its simplest form: Y= A x Kα x Lβ. The aforementioned equation represents total output (Y) as a function of capital (K), labor (L) and total-factor productivity (A). Total factor productivity, as mentioned before plays a crucial part in economic growth, fluctuations and differences in income per-capita across the country. Another way to interpret and explain the positive relationship between an economy’s output as a function of capital and labor, given technology is the absolute assumption of constant returns to scale and a competitive factor market making it easier to calculate output growth rate via capital and physical labor. However the inconsistent deviations in output from this implicit growth rate are a direct result of technological and institutional changes amongst other factors. These very deviations are also called, total factor productivity. Growth in total factor productivity, contributes modestly to the average performance of output across all countries. Even though it’s contribution to average