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Productivity and the Welfare of Nations

  • Basu, Susanto

    (Boston College and NBER)

  • Pascali, Luigi

    (University of Warwick)

  • Schiantarelli, Fabio

    (Boston College and IZA)

  • Serven, Luis

    (World Bank)

We show that the welfare of a countrys in nitely-lived representative consumer is summarized, to a rst order, by total factor productivity (TFP) and by the capital stock per capita. These variables su¢ ce to calculate welfare changes within a country, as well as welfare di¤erences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not rms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 163.

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Date of creation: 2013
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Handle: RePEc:cge:wacage:163
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