Abstract
Natural decomposition of total factor productivity (TFP) growth is carried out in this chapter. Total factor productivity growth consists of two components: (1) Solow's technical progress and (2) economies of scale. The former is independent of the change in production scale and referred to as disembodied technological change, while the latter is associated with a change of production scale and depends upon the output elasticities of input factors. It is referred to as embodied technological change. Product output growth can be divided into two components: extensive growth and intensive growth. The former is numerically equal to the total factor (TF) growth, and the latter equals the total factor productivity (TFP) growth. The purpose of this paper is to reveal the natural decomposition of total factor productivity growth and product output growth. The method of decomposition, developed in this paper, can be used for measuring the TFP growth components and the output growth components at either a micro-level (for firm, industry) or a macro-level (for regional or national economy). In illustration of the methodology, an example is presented.
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