Total factor productivity

Examples of Total factor productivity in the following topics:

• Total Factor Productivity

  • Increases in total factor productivity reflect a more efficient use of inputs, and total factor productivity is often taken as a measure of long-term technological change or dynamism brought about by such factors as technical innovation.
  • Total factor productivity cannot be measured directly.
  • In the Cobb-Douglas production function, total factor productivity is captured by the variable A:
  • Total factor productivity can be used to measure competitiveness.
  • Total output is not only a function of labor and capital, but also of total factor productivity, a measure of efficiency.

• Measuring Productivity

  • While different economic perspectives often identify different factors of production (i.e. inputs in the system), it is useful to identify the following:
  • This will include the derivation of a marginal product for each factor (see ), or essentially the extra output that can be created for each additional unit of input.
  • In this circumstance 'Q' is the quantity of output while each 'x' is a factor input.
  • In the equation, 'Y' is total production while 'L' is labor, 'K' is capital, 'A' is total factor productivity and the alpha and beta are the elasticity of the two inputs.
  • Leontief Production Function: The Leontief Production Function assumes a technologically pre-determined set of proportions for the factors of production (i.e. no ability to substitute between factors.

• Types of Costs

  • In economics, the total cost (TC) is the total economic cost of production.
  • Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs .
  • The cost "varies" according to production.
  • They are only fixed in relation to the quantity of production for a certain time period.
  • The sum of the two equal the total cost.

• The Law of Diminishing Returns

  • In economics, diminishing returns (also called diminishing marginal returns) is the decrease in the marginal output of a production process as the amount of a single factor of production is increased, while the amounts of all other factors of production stay constant.
  • The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common.
  • The average total cost of production is the total cost of producing all output divided by the number of units produced.
  • Average total cost is interpreted as the the cost of a typical unit of production.
  • As long as the marginal cost of production is lower than the average total cost of production, the average cost is decreasing.

• Other Approaches to Calculating GDP

  • This method measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labor, interest for capital, rent for land, and profits for entrepreneurship.
  • Compensation of employees (COE) measures the total remuneration to employees for work done.
  • The sum of COE, GOS, and GMI is called total factor income; it is the income of all of the factors of production in society.
  • The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production.
  • So, adding taxes less subsidies on production and imports converts GDP at factor cost (as noted, a net domestic product) to GDP.

• Average and Marginal Cost

  • Marginal cost is the change in total cost when another unit is produced; average cost is the total cost divided by the number of goods produced.
  • Economic factors that impact the marginal cost include information asymmetries, positive and negative externalities, transaction costs, and price discrimination.
  • The total cost for making two pairs of shoes is $40.
  • Average cost can be influenced by the time period for production (increasing production may be expensive or impossible in the short run).
  • Average costs are the driving factor of supply and demand within a market.

• National Income

  • A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net national income (NNI), and adjusted national income (NNI* adjusted for natural resource depletion).
  • Arriving at a figure for the total production of goods and services in a large region like a country entails a large amount of data-collection and calculation.
  • At factor cost = GDP at market price - depreciation + NFIA (net factor income from abroad) - net indirect taxes
  • The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation:
  • NDP at factor cost = compensation of employees + net interest + rental and royalty income + profit of incorporated and unincorporated NDP at factor cost

• Marginal Product of Labor (Physical)

  • When production is discrete, we can define the marginal product of labor as ΔY/ΔL where Y is output.
  • When production is continuous, the MPL is the first derivative of the production function in terms of L.
  • gives another example of marginal product of labor.
  • The second column shows total production with different quantities of labor, while the third column shows the increase (or decrease) as labor is added to the production process.
  • The key factor is that the variable input is being changed while all other factors of production are being held constant.

• Aggregate Production

  • The production function relates the physical outputs of production to the physical inputs or factors of production.
  • To understand how the aggregate production impacts long-run growth, it is important to understand the stages of production :
  • The average physical product is at its maximum.
  • The production function of a firm or economy can be graphed using the total, average, and marginal products.
  • The aggregate production is determined based on the stages of production and the results of the graph.

• Introducing Aggregate Supply

  • It is the total amount of goods and services that the firms are willing to sell at a given price level in the economy.
  • Aggregate supply is the relationship between the price level and the production of the economy .
  • In the short-run, firms have one fixed factor of production (usually capital).
  • In the equation, Y is the production of the economy and Y* is the natural level of production of the economy.
  • Aggregate supply is the total quantity of goods and services supplied at a given price.