The link between total factor productivity, prices and financial performance, with summary illustrations from air and rail transportation

Total factor productivity has been a principal means of measuring performance both for monitoring performance improvement over time as well as performance comparisons across firms. Productivity compares output quantities with quantities of inputs (more specifically, the growth in outputs relative to the growth in inputs). However, strong productivity performance is not necessarily an indicator of strong financial performance; and the converse is true as well, for example, firms with market power can achieve profitability despite poor productivity performance. This paper will show how to take data from TFP studies to link changes in TFP with changes in the firm's financial condition. It does this by examining the changes in input price indices relative to output price indices; these are dual to the output and input quantity indices used for TFP measurement. This link between productivity, prices and financial performance has been utilized in the management literature but has found almost no application in the economics literature on performance measurement. Tracking TFP along with "total price performance" (TPP, the ratio of input price indices divided by the output price indices) reveals the sharing of productivity gains between firms and their customers and hence the change in financial condition of the firm. These data are compiled in TFP studies but appear to be not reported or not utilized in the manner shown here. Hence this paper will show a useful additional interpretation of existing TFP studies. The productivity and "total" price relationships are demonstrated with applications to rail transportation and major world airlines. Tracking TFP and TPP over time reveals the sharing of productivity gains and any shifts in market power.

Language

  • English

Media Info

  • Pagination: 11p
  • Serial:
    • Issue Number: ITS-WP-97-18

Subject/Index Terms

Filing Info

  • Accession Number: 01436925
  • Record Type: Publication
  • Source Agency: ARRB
  • Files: ATRI
  • Created Date: Aug 24 2012 8:12PM