Industry and Development Vocabulary Practice Test

Total factor productivity is about how efficiently all inputs are turned into output, not just how much of one input is used. It captures the part of output growth that cannot be explained by increases in measured inputs like labor and capital. In practice, it’s the residual that reflects technology, better management, organizational improvements, and other factors that raise overall efficiency.

So the best way to describe it is: output that cannot be explained by the amount of inputs used, isolating the gains from technology and efficiency beyond labor and capital. This is different from labor productivity, which only looks at output per unit of labor. Labor productivity is a partial measure focused on one input, whereas total factor productivity accounts for multiple inputs and their combined efficiency. It’s also not the sum of inputs, and it does not exclude technology effects; rather, technology effects are part of the residual that defines TFP.