Total factor productivity. Gerhart Company manufactures wallets from fabric. In 2011, Gerhart made 2,520,000 wallets using 2,000,000 yards of fabric. In 2011, Gerhart has capacity to make 3,307,500 wallets and incurs a cost of $9,922,500 for this capacity. In 2012, Gerhart plans to make 2,646,000 wallets, make fabric use more efficient, and reduce capacity. Suppose that in 2012 Gerhart makes 2,646,000 wallets, uses 1,764,000 yards of fabric, and reduces capacity to 2,700,000 wallets, incurring a cost of $8,370,000 for this capacity.
Assume the fabric costs $3.70 per yard in 2012 and $3.85 per yard in 2011.
1. Compute Gerhart Company’s total factor productivity (TFP) for 2012.
2. Compare TFP for 2012 with a benchmark TFP for 2011 inputs based on 2012 prices and output.
3. What additional information does TFP provide that partial productivity measures do not?