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Productivity and the Welfare of Nations

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  • 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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Cited by:
  1. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Working Papers 621, Barcelona Graduate School of Economics.
  2. Ezra Oberfield, 2012. "Online Appendix to "Productivity and Misallocation During a Crisis: Evidence from the Chilean Crisis of 1982"," Technical Appendices 11-215, Review of Economic Dynamics.
  3. Nicholas Oulton, 2012. "Hooray for GDP!," CEP Occasional Papers 30, Centre for Economic Performance, LSE.
  4. repec:cge:warwcg:162 is not listed on IDEAS
  5. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.
  6. 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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