The gap between developed and developing countries. Now ignore total factor productivity. It becomes even more critical when the capital per worker ratio is high, as in developed countries. The source of growth. As I explained earlier, total factor productivity is the key to long-run economic growth because labor and capital have a decreasing marginal return. You can also get it on the OECD website, which covers several countries other than the United States.
Louis website for the United States’ private business sector.
For example, you can find it on the Federal Reserve Bank of St. You will get the error or residual from the regression, and that’s ∆A/A. Then, you regress ∆K/K and ∆L/L against ∆Y/Y. Thus, to obtain total factor productivity growth (∆A/A), you must have data for ∆K/K, ∆L/L, and ∆Y/Y. Meanwhile, ∆A/A represents the residuals of the model. ∆K/K and ∆L/L represent the independent variables (predictors), where α and β show you the impact of growth in capital and labor on aggregate output growth. ∆A/A = Total factor productivity growthĮquation 3 above shows you a regression model.Total factor productivity growthįurthermore, from the previous Equation 1, we can also rewrite it to measure aggregate output growth. More advanced technology allows the economy to produce greater output even though labor and capital are fixed. In the production possibilities curve, it is reflected by shifts in the curved lines to points outside the curve. Technological advances will result in an outward shift in the production function. Third, the only way to sustain economic growth in the long run (potential GDP) is to increase total factor productivity (A) through technology. Thus, when it is high (K/L), the addition of capital investment only contributes less significantly than when it was low. The capital-power ratio has a decreasing rate of return. Second, investing in capital deepening – which increases the capital-power ratio – is not the solution to sustaining long-term growth. Thus, in the long run, labor and capital contribution to output is at a decreasing rate. Y/L = Output per worker or worker productivityįrom the first and second equations, we can take three critical points:įirst, labor and capital face diminishing marginal returns (you can see, α and β are less than 1).We can rewrite equation 1 above as output per worker. β = Output elasticity of labor (β α = Output elasticity of capital (α The aggregate economic output formula is as follows: Or, they can also produce more output using the same quantity of input because machines are more efficient. With more sophisticated machines, manufacturers can produce the same output but faster than before. For example, they can learn from the internet to acquire new skills or find ways to do their jobs faster.Īdvances in technology are also responsible for increasing business output significantly. Advances in technology make workers more productive.
One of them is technological advancement. There are various explaining factors for total factor productivity.