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Productivity and the welfare of nations

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  • Susanto Basu
  • Luigi Pascali

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  • Fabio Schiantarelli
  • Luis Serven

Abstract

We show that the welfare of a representative consumer can be related to observable aggregate data. To a first order, the change in welfare is summarized by (the present value of) the Solow productivity residual and by the growth rate of the capital stock per capita. We also show that productivity and the capital stock suffice to calculate differences in welfare across countries, with both variables computed as log level deviations from a reference country. These results hold for arbitrary production technology, regardless of the degree of product market competition, and apply to open economies as well if TFP is constructed using absorption rather than GDP as the measure of output. They require that TFP be constructed using prices and quantities as perceived by consumers. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. We apply these results to calculate welfare gaps and growth rates in a sample of developed countries for which high-quality TFP and capital data are available. We find that under realistic scenarios the United Kingdom and Spain had the highest growth rates of welfare over our sample period of 1985-2005, but the United States had the highest level of welfare.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1312.

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Date of creation: Mar 2012
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Handle: RePEc:upf:upfgen:1312

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Web page: http://www.econ.upf.edu/

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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. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Working Papers 621, Barcelona Graduate School of Economics.
  2. Nicholas Oulton, 2012. "Hooray for GDP!," CEP Occasional Papers 30, Centre for Economic Performance, LSE.
  3. 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.
  4. Dollar, David & Kleineberg, Tatjana & Kraay, Aart, 2014. "Growth, inequality, and social welfare : cross-country evidence," Policy Research Working Paper Series 6842, The World Bank.
  5. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.

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