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Productivity and the welfare of nations

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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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  • Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the welfare of nations," Economics Working Papers 1312, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:1312
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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 2014-09-04 02:02:47

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    Cited by:

    1. David Dollar & Tatjana Kleineberg & Aart Kraay, 2015. "Growth, inequality and social welfare: cross-country evidence," Economic Policy, CEPR;CES;MSH, vol. 30(82), pages 335-377.
    2. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the welfare of nations," Economics Working Papers 1312, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Nicholas Oulton, 2012. "Hooray for GDP!," CentrePiece - The Magazine for Economic Performance 383, Centre for Economic Performance, LSE.
    4. David Baqaee & Ariel Burstein, 2021. "Welfare and Output with Income Effects and Demand Instability," NBER Working Papers 28754, National Bureau of Economic Research, Inc.
    5. Ville Kaitila, 2016. "GDP growth in Russia: different capital stock series and the terms of trade," Post-Communist Economies, Taylor & Francis Journals, vol. 28(2), pages 129-145, April.
    6. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Working Papers 621, Barcelona Graduate School of Economics.
    7. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.
    8. Michael Peneder & Christian Rammer, 2018. "Measuring Competitiveness," WIFO Studies, WIFO, number 60838, December.
    9. Gabriel Felbermayr & Benjamin Jung & Gabriel J. Felbermayr, 2015. "Market Size and TFP in New New Trade Theory," CESifo Working Paper Series 5583, CESifo.
    10. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the welfare of nations," Economics Working Papers 1312, Department of Economics and Business, Universitat Pompeu Fabra.
    11. 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.

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    More about this item

    Keywords

    Productivity; Welfare; TFP; Solow Residual.;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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