Total Factor Productivity and Growth

Subject: Economy

Context: The moot question now before the economy is even though growth will revive in 2020-21, how soon will it move to a higher trajectory and how soon will it be in the zone of non-inflationary sustainable levels.

Concept:

• This requires higher investment relative to GDP supported by increased financial savings in the economy and augmentation of total factor productivity in terms of physical and human capital investment.

Economic growth

• Economic growth is a function of the quantity of inputs such as labour and capital employed for productive purposes, along with factor productivity.
• It is intuitive that if more people are employed, more goods and services would be produced. Over time, due to a rise in population, labour employed increases and due to accumulation, capital also increases in an economy.
• A rise in productivity enables an economy to grow faster with the same set of labour and capital being employed. It is important to recognize the factors responsible for growth to address the current slowdown.

Total Factor Productivity

• Total factor productivity (TFP) is derived as a ratio of the total production and weighted average of inputs such as labour and capital.
• The measure gives us the growth in real output, which is in addition to the growth in inputs such as labour or capital employed for productive purposes.
• So TFP gives us the relationship between the quantity of factors employed and the output in an economy. A higher TFP implies higher growth with the same set of labour and capital employed.