Total factor productivity and its role in measuring economic growth

Total factor productivity (TFP) is a measure of economic growth that accounts for improvement in output with the same amount of inputs. TFP estimates how much growth is not explained by changes in labor and capital, considering it as a residual. TFP consists of unexplained variation in growth, which could be attributed to better recipes or ideas for production, such as technological advancements and improved institutional quality. The heyday of TFP growth was from 1920 to the early 1970s, when it averaged around 2% per year. However, since then, TFP growth has slowed down considerably, with rates dropping to 0.3% per year since 2005.