Total Factor Productivity And Its Importance †MyAssignmenthelp.com

Question: Discuss about the Factor Productivity And Its Importance. Answer: Introduction: One of the factor that is considered precarious for economic fluctuation, economic growth and per capital difference across county is total factor productivity (TFP). The amount of input used in the process of production is not defined by the total factor productivity. Level of TFP is determined by how intensely and efficiently inputs are utilized in production. Number of hours worked and output level has strong correlation with the TFP. In the model of standard business cycle, investment and pro cyclical supply of labour are promulgated by shocks to factor productivity. This helps in generating fluctuations to labour productivity and output under the business models. TFP helps in driving income per capita in an economy as a part of long growth. Determinants of TFP are highlighted using the endogenous growth models when growth rate in TFP are linked to innovation (Ayres et al. 2014). Growth in output is represented by TFP. Factor productivity can be different in different countries d ue to difference in technological efficiencies and physical technologies possessed by them. Discussion: Business cycle is significantly impacted by endogenous innovation decisions that affects the growth of total factor productivity. It is regarded as a mechanism that helps in propagating shocks that are of low persistence that helps in increasing persistence rather than creating any disturbances. A firm is able to convert its inputs into outputs using several combination of inputs as incorporated in the production process. Production process helps in establishing relationship between resulting outputs by using various input combinations. Production process helps in indicating the maximum level of output that can be produced by organization sing different level of inputs. For making the concept simpler, it is assumed that firm would be using toe inputs that is labour and capital. Growth in Total factor productivity is derived by calculating domestic growth output that is not explained by growth in inputs used in production process. In other words, it is the combined efficiency of capit al inputs and labour inputs relative to value added in economy. TFP growth is often referred to, as Solow residual is it has disembodied technological change. However, it also involve some factor beyond technological change. Following equation represents production function using labour and capital as inputs to production process. q= f (A, L, K) The above equation explains relationship between quantities of two inputs that is labour and capital in output determination. L symbolises labour and K symbolises capital. Another component A denotes technological factors. A that is measured by technological factors denotes total factor productivity. Competitiveness of organization or country can be measured using TFP. A country is likely to be more competitive if it has higher total factor productivity and it is regarded as one of the main driver of economic growth. If a country is able to experience increased total factor productivity, then sing same level of resources, it can yield higher output and thereby leading to higher economic growth. The primary point of distinction between A and (K and L) is that former is TFP that account technology as its measured factors and later are inputs to production process (Gupta et al. 2014). Output can produced by firms output in various ways because production functions make use of inputs in varying proportion for producing different level of outputs. If looked at the above production function as indicated by equation, it can be seen that firm using more labour will have to use less capital and vice versa. Suppose, an organisation wants to manufacture cars, it can rely on more capital usage or more labour. There can be employment of labour intensive techniques for manufacturing or capital intensive techniques whatever is suitable to the organizations production process. An increase in either L or K will lead to increase in level of output. However, in the long run due to applicability of law of diminishing return to variable factors, an increase in input to certain level will fail to increase output. TFP accounts for wide range of factors such as innovation, human capital and technology. With the advancement of technologies and change in the production process, a firm is capable of producing more output with the given amount of inputs. An organization are operating efficiently as described by technical feasibility and it is indicative of the fact that inputs are being utilized efficiently. It has been realized by economist that process of economic growth is driven by total factor productivity. Concept of TFP growth has three major improvements over traditional Solow residual approach. TFP growth is estimated as it involves changes made to input factors and allowing non-constant return to scale. In second part, TFP also incorporates indirect and direct effects through intermediate linkages to economy and in addition to this; it takes into account characteristics of open economy by assigning role of trade shocks (Kogan et al. 2017). Slowdown in rate of growth of Total factor productivity in merging market is considered as decisive break The above graph accounts for growth in total factor productivity for the changes in output that is not caused by changes in capital or labour input. Negative growth in total factor productivity can result from negative effects from recession that needs to be short lived when the economy is recovered. Since decades, the ongoing trend indicates technological progress is weakened by TFP. Investment made in economy can be sustained by faster growth in productivity (Restuccia 2013). Incorporation of measurement errors in output and capital in TFP growth: Labour becomes more efficient if they are provided with better technology and increase in productivity is not attributable to increased knowledge or better technologies. There can be sustained growth in per capital income of country o economy if there is an increase in per capita input. For over the past 150 years, advanced economies have experienced sustainable growth in their per capita income. Reason is attributable to technological advances leading to increased total factor productivity. Considering rise in long-term per capita income of US that 80% rise in level of output accounted for technological advancement and 20% resulting from increased capital investment. Inputs and efficiency are the two factors that are responsible for capitalist growth. There are three propositions that are responsible for success of economies and input factors driving growth are regarded as inherently limited. It incorporated world technologies diffusion, monetary view and economic centre of gravity shifting to Asian nations. Estimated growth of total factor productivity are sensitive for the assumptions about economics of scale. Distinction needs to be done at various developmental level. When factors other than technological change represents growth, difficulty arises in interpretation of measuring growth in TFP. Incapability of K and L in driving economy towards long-term sustainable growth: Technological factors suggest growth and technological progress is experienced in recent histories. From both theoretical and empirical point of view, one of the major growth of technological progress is the technological progress. An addition or employment of extra nit of input by keeping all other factors constant will lead to fall in output level according to law of diminishing marginal return. Due to this, a country by accumulating capital and labour will not be able to maintain long-run growth. The contributory factor resulting in growth of per capita output of any economy is technological advancement, capital stock and labour input (Gupta 2014). Increasing income inequality in country is related to declining share of labours and it is responsible for concentrating labour income. Growth of labour productivity forms the basis of sustainable economic growth. Growth of income witness a decline if growing national income share is spend towards national income. The reason is attributable to the fact that distribution of capital income towards labour income is more evenly distributed compared to households. Growing inequality in wage has been mainly due to falling share of labour in productivity. Labour division forms the basis of growth within, between the economy and rest part of world. Each workers are required to have particular skills and such expertise helps in enhancing each workers productivity. Overall national growth results from labour supply growth and increase in value of goods produced in the country (Buccirossi et al. 2013). Importance of TFP as a force of sustainable growth: TFP as a source of sustainable growth can be explained by taking an example of Asian country that is Singapore. This is done by analysing source of growth in output by using the estimation techniques of total factor productivity over the past several decades. Considering this case can be an outstanding example of growth of TFP. It has been ascertained since 1970s that growth of TFP in Singapore has been slow and economy is driven by input. One of the driving force of output growth in country is the capital input (Balcerowicz et al. 2015). It can be seen that target of achieving target growth is prevented by diminishing return to factors. Technical progress and technical efficiency needs to be differentiated and growth in TFP needs to be identified by industrial sector. Technical efficiency in the country is negative and growth of total factor productivity is driven by technological progress (Jones 2015). It has been explored that capital deepening helps in enhancing the technical pro gress of country. A country needs to have human capital development policies for enhancing the growth of TFP through progress in technical efficiency. Total factor productivity is the technological level or level of productivity in an economy. An increase in capital to labour ratio is indicative of fact of increase in capital deepening. Other segments of economy becomes uncompetitive due to appreciation of currency from natural resources exports. There are certain endogenous innovation decisions that leads to growth in total factor productivity and has several implications in business cycle. Certain factors that helps in generation of pro cyclical fluctuations low persistence and non-technological shocks given by innovation market profile. TFP technology adoption determinants helps in explaining cross-country variations (Halpern et al. 2015). The long-term source of economic growth is provided by total factor productivity. It represents externalities that helps in creating societal benefits resulting from return on inputs and this is beyond factors that are internalized by investors. Growth in TFP is regarded as compounding measure. It is indicative of fact that annual improvement do not add up over long time-period. Gradual erosion in economy and its ability to prevent decline results from long-term slowdown due to falling growth in TFP. Facts that are reflected in TFP involves technological change, market structure, other spillovers and things that is measured wrongly and intangible assets that is left unmeasured (De Gregorio 2016). Therefore, TFP is not only required in business corporation but also in the area of public policy makers interest. In several mature economies, slowdown in growth of TFP is a major matter of concern. One of the sustainable source of ling-term growth of economy is TFP and this is so because economy keeps running because of productivity. Diminishing return is not incorporated in the growth factor as compared to homogenous inputs. The workhorses of economic growth empirical analysis is growth measurement and growth accounting. Assumption of constant return to scale, factor neutral technological change and marginal cost pricing with regard to TFP notion seems to be widely accepted (Calligaris 2015). Conclusion: Rate of change in economy productivity and potential gross domestic product helps in measuring sustainable economic growth rate. Increase in total factor productivity shifts or changes the entire production capacity of economy as a whole. Factors driving economic growth involves technological changes along with quantity and quality of capital and labour supplied in economy. 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