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Productivity and the Welfare of Nations

  • Basu, Susanto

    (Boston College and NBER)

  • Pascali, Luigi

    (Department of Economics, University of Warwick)

  • Schiantarelli, Fabio

    (Boston College and IZA)

We show that the welfare of a country’s infinitely-lived representative consumer is summarized, to a firrst order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice 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 firms. 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. JEL classification: D24 ; D90 ; E20 ; O47

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 1027.

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Date of creation: 2013
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Handle: RePEc:wrk:warwec:1027
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