Measurement of total factor productivity is based on the economic theory of production. For this purpose the theory consists of a production function with constant returns to scale together with the necessary conditions for producer equilibrium. Quantities of output and input entering the production function are identified with real product and real factor input as measured for social accounting purposes. Marginal rates of substitution are identified with the corresponding price ratios. Employing data on both quantities and prices, movements along the production function may be separated from shifts in the production function. Shifts in the production function are identified with changes in total factor productivity.

Our point of departure is that the economic theory underlying the measurement of real product and real factor input has not been fully exploited. As a result a number of significant errors of measurement have been made in compiling data on the growth of real product and the growth of real factor input. The result of these errors is to introduce serious biases in the measurement of total factor productivity. The allocation of changes in real product and real factor input between movements along a given production function and shifts of the production function must be corrected for bias due to errors of concept and measurement.