Question

Suppose the growth in aggregate output Y is: ΔY/Y = ΔA/A + 0.33 ΔK/K + 0.67 ΔL/L The coefficients mean that one third of output is paid to capital in profits (and depreciation), and two-thirds to labor (at wages). If in the US, Labor is growing at 1.9%: Capital, 3.2%; and US output is growing at 3.1%. Calculate MFP, explain how it arises, define its importance, and provide a policy to raise it.

Answer 1

MFP in ts the difference between the overall output growth and the growth of labor and capital. The difference between the growth of output and growth of inputs is multi factor productivity and is a way to quantify technical progress.

In the given scenario MFP = (growth of output) - 0.33(growth of capital) - 0.67(growth of labor)

MFP = 3.1 - 0.33(3.2) - 0.67(1.9) = 3.1 - 1.056 -1.273 = 3.1 - 2.329 = 0.771%

MFP is an important concept and helps us measure the technical progress and growth of efficiency due to new ideas and innovation.
MFP can be increased through investment in capital , both physical and human capital. Increasing such investment can improve growth and this might work better in a space with better institutions which help enhance the productivity of both labor and capital.