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MENTAL MODEL · M0137

Total Factor Productivity - TFP

Total Factor Productivity - TFP
BusinessHigh supportMacroeconomics
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Version 1.0.0 · Updated 2026-07-28

CORE DEFINITION

In macroeconomics, total factor productivity (TFP), also known as total factor productivity or rate of technological progress, refers to all factors affecting output other than external inputs such as capital and labor. In simple terms, it is the improvement in the intrinsic strength of an economy, characterized by its ability to explain the factors of economic growth through a single simple figure.

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In macroeconomics, total factor productivity (TFP), also known as total factor productivity or rate of technological progress, refers to all factors affecting output other than external inputs such as capital and labor. In simple terms, it is the improvement in the intrinsic strength of an economy, characterized by its ability to explain the factors of economic growth through a single simple figure.

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In the production function Y = A·f(K,L), A is the TFP (Solow residual). The portion of output growth that exceeds the increase in factor inputs is attributed to technology/efficiency/institutions. The quality of long-term growth depends on TFP rather than on piling up factors.

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