Wednesday, September 24, 2014

Let me repeat that

From Total Fudge-Factor Productivity:
Total Factor Productivity is a fudge factor.

TFP is an adjustment to make the answer come out right ... because the growth of labor and capital do not fully account for the growth of output.

Diego Comin writes: "Total Factor Productivity (TFP) is the portion of output not explained by the amount of inputs used in production."

Jazzbumpa quotes Wikipedia: "TFP cannot be measured directly. Instead it is a residual, often called the Solow residual, which accounts for effects in total output not caused by inputs."

Total Factor Productivity is "a residual". We use it to explain the part of growth that we can't explain. TFP is like the ether or Einstein's cosmological constant.

TFP is not an explanation. It is a fudge factor.

1 comment:

The Arthurian said...

From J.W. Mason, Links for October 6 2016:
"I finally read the Romer piece on the trouble with macro. Some good stuff in there. I’m glad to see someone of his stature making the point that the Solow residual is simply the part of output growth that is not explained by a production function. It has no business being dressed up as “total factor productivity” and treated as a real thing in the world."