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Productivity and the Welfare of Nations

  • Susanto Basu

    (Boston College

  • Luigi Pascali


    (Boston College)

  • Fabio Schiantarelli


    (Boston College

  • Luis Serven

    (World Bank)

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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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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