Total Factor Productivity
Total Factor Productivity
Total Factor Productivity
BOOK REFERENCE
1. Miles, D. and A. Scott, Macroeconomics – Understanding the Wealth of
Nations, John Wiley & Sons, England, 2005.
2. Lambsdorff, Johann Graf, The Institutional Economics of Corruption & Reform:
Theory, Evidence and Policy, 2007.
3. Lipsey, Richard G, Economics, Harper Collins, USA, 1993.
TOTAL FACTOR PRODUCTIVITY (TFP)
TFP is the measure of efficiency on how all production inputs is utilized. It reflects a
huge range of influences on both economics and socio-cultural. Here we will only have
a look on a few factors that might influence a level of TFP.
1
1. It absorbs labor that could be potentially productive in entrepreneurships
2. Rent seekers act as a tax and decrease the supply of entrepreneurs
3. If rent seeking is rewarded high, the most talented people become rent seekers
and entrepreneurs' quality gets suffered
Corruption is a form of Rent Seeking activities presents in many countries and in some
cases, corruption could help boost the economy if it helps to oil the wheels of trade.
Despite that fact, corruption adversely affects TFP and the level of output in an
economy.
Another form of Rent Seeking is lobbying, a form of rent-seeking activities done by
rent-seekers to obtain prospects rents. While, lobbying is commonly pursued between
two parties or more with the same interest in self-enrichment and increase rent’s size;
corruption is commonly described as the more monopolistic form of rent-seeking.
Moreover, corruption has worse welfare implication than alternate rent seeking
activities.
Studies showed that the least corrupt economies are richer than most corrupt. This is
due to the lack of trust to public institution caused by corrupt economies; whereas trust,
between contractual partners, is an indispensable part of successful economy. This is
known as Social Capital. Societies with high social capital have higher value added
activities. Thus, Institutions must encourage individuals to earn their income through
engaging in Entrepreneurships rather than any Rent Seeking activities.