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Productivity and the Welfare of Nations

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Author Info

  • Basu, Susanto

    ()
    (Boston College)

  • Pascali, Luigi

    ()
    (Pompeu Fabra University)

  • Schiantarelli, Fabio

    ()
    (Boston College)

  • Serven, Luis

    ()
    (World Bank)

Abstract

We show that the welfare of a country's infinitely-lived representative consumer is summarized, to a first order, 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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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6461.

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Length: 65 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6461

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Keywords: TFP; welfare; productivity; 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. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Boston College Working Papers in Economics, Boston College Department of Economics 793, Boston College Department of Economics, revised 21 Apr 2012.
  2. Dollar, David & Kleineberg, Tatjana & Kraay, Aart, 2014. "Growth, inequality, and social welfare : cross-country evidence," Policy Research Working Paper Series 6842, The World Bank.
  3. Nicholas Oulton, 2012. "Hooray for GDP!," CentrePiece - The Magazine for Economic Performance, Centre for Economic Performance, LSE 383, Centre for Economic Performance, LSE.
  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. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, Elsevier, vol. 42(5), pages 1080-1098.

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