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Productivity and the Welfare of Nations

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  • Susanto Basu

    (Boston College
    NBER)

  • Luigi Pascali

    ()
    (Boston College)

  • Fabio Schiantarelli

    ()
    (Boston College
    IZA)

  • Luis Serven

    (World Bank)

Abstract

We show how to relate the welfare of a country's infinitely-lived representative consumer to observable aggregate data. To a first order, welfare is summarized by total factor productivity and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare differences across countries. The result holds regardless of the type of production technology and the degree of market competition. It applies to open economies as well, if total factor productivity is constructed using domestic absorption, instead of gross domestic product, as the measure of output. It also requires that total factor productivity be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates and they will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of developed countries with high-quality total factor productivity and capital data. Under realistic scenarios, the U.K. and Spain had the highest growth rates of welfare during the sample period 1985-2005, but the U.S. had the highest level of welfare.

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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 793.

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Date of creation: 28 Mar 2012
Date of revision: 21 Apr 2012
Handle: RePEc:boc:bocoec:793

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Keywords: Productivity; Welfare; TFP; Solow Residual;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Total Factor Productivity as a Measure of Welfare
    by dvollrath in The Growth Economics Blog on 2014-09-03 21:02:47
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Cited by:
  1. Basu, Susanto & Pascali, Luigi & Schiantarelli, Fabio, 2013. "Productivity and the Welfare of Nations," The Warwick Economics Research Paper Series (TWERPS) 1027, University of Warwick, Department of Economics.
  2. Nicholas Oulton, 2012. "Hooray for GDP!," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 47498, London School of Economics and Political Science, LSE Library.
  3. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.
  4. Ezra Oberfield, 2013. "Productivity and Misallocation During a Crisis: Evidence from the Chilean Crisis of 1982," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 100-119, January.
  5. Dollar, David & Kleineberg, Tatjana & Kraay, Aart, 2014. "Growth, inequality, and social welfare : cross-country evidence," Policy Research Working Paper Series 6842, The World Bank.

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