Answer to Question #178100 in Macroeconomics for tandy

Question

Improvements in total factor productivity (TFP) - if it helps, think of TFP this as technological advancement - are also expected to suffer because of the pandemic. According to a NBER working paper, COVID-19 has lowered the TFP in the UK private sector by up to 5 percent.

a.     Describe the effect of this fall in TFP on the UK output/GDP with the help of a diagram.

Answer 1

We can say

In Economics

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total-factor productivity (TFP), also called multi-factor productivity,

$\bull$ usually measured as the ratio of aggregate output (e.g., GDP) to aggregate inputs.

$\bull$ The rate of TFP growth is calculated by subtracting growth rates of labor and capital inputs from the growth rate of output.

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The Covid-19 shock has had asymmetric effects across sectors of the economy,

$\bull$ with those sectors that involve the most social contact in consumption bearing the brunt.

$\bull$ This column uses data from the Decision Maker Panel business survey data to assess how the spread of Covid-19 and measures to contain it are likely to affect productivity.

$\bull$ It estimates total factor productivity in the UK private sector is likely to be lower than it would have been, by up to 5% in 2020 Q4,

$\bull$ falling back to a 1% reduction in the medium term.

$\bull$ Firms anticipate a large reduction in ‘within-firm’ productivity,

primarily because measures to contain Covid-19 are expected to increase intermediate costs.

$\bull$ Since the pandemic disproportionally affected firms in low-productivity sectors, and the least productive firms within these sectors, these become a smaller part of the economy and therefore a positive ‘between-firm’ reallocation effect partially offsets the negative ‘within-firm’ effect.

diagram