The formula to calculate Total Factor Productivity (TFP) is:
\[ \text{TFP} = \frac{\text{Output}}{(\text{Labor Input})^{0.5} \times (\text{Capital Input})^{0.5}} \]
Where:
Total Factor Productivity (TFP) is a measure of the efficiency and effectiveness with which both labor and capital inputs are used in the production process. It is considered an indicator of technological progress or innovation within an economy or firm. A higher TFP value suggests that the firm or economy is producing more output per unit of input, which is a sign of greater efficiency.
Let's consider an example:
Using the formula to calculate Total Factor Productivity:
\[ \text{TFP} = \frac{1000}{(500)^{0.5} \times (200)^{0.5}} = 3.16 \]
This means that the Total Factor Productivity is 3.16.
