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Productivity and the Welfare of Nations

Author

Listed:
  • Susanto Basu

    (Boston College)

Abstract
We show that the welfare of a countrys infinitely-lived representative consumer is summarized, to a first 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 differences 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.

Suggested Citation

  • Susanto Basu, 2014. "Productivity and the Welfare of Nations," 2014 Meeting Papers 787, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:787
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    References listed on IDEAS

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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. Nicholas Oulton, 2022. "The Productivity-Welfare Linkage: A Decomposition," Discussion Papers 2205, Centre for Macroeconomics (CFM).
    2. David Dollar & Tatjana Kleineberg & Aart Kraay, 2015. "Growth, inequality and social welfare: cross-country evidence," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 30(82), pages 335-377.
    3. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Working Papers 621, Barcelona School of Economics.
    4. Nicholas Oulton, 2012. "Hooray for GDP!," CentrePiece - The magazine for economic performance 383, Centre for Economic Performance, LSE.
    5. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2022. "Productivity and the Welfare of Nations," Journal of the European Economic Association, European Economic Association, vol. 20(4), pages 1647-1682.
    6. David R Baqaee & Ariel Burstein, 2023. "Welfare and Output With Income Effects and Taste Shocks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(2), pages 769-834.
    7. Monacelli, Tommaso & Sala, Luca & Siena, Daniele, 2023. "Real interest rates and productivity in small open economies," Journal of International Economics, Elsevier, vol. 142(C).
    8. 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.
    9. Guido Sandleris & Mark L. J. Wright, 2014. "The Costs of Financial Crises: Resource Misallocation, Productivity, and Welfare in the 2001 Argentine Crisis," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(1), pages 87-127, January.
    10. Susanto Basu & Luigi Pascali & Fabio Schiantarelli & Luis Serven, 2012. "Productivity and the Welfare of Nations," Working Papers 621, Barcelona Graduate School of Economics.
    11. Hyytinen, Ari & Maliranta, Mika, 2013. "Firm lifecycles and evolution of industry productivity," Research Policy, Elsevier, vol. 42(5), pages 1080-1098.
    12. Michael Peneder & Christian Rammer, 2018. "Measuring Competitiveness," WIFO Studies, WIFO, number 60838, April.
    13. Gabriel Felbermayr & Benjamin Jung & Gabriel J. Felbermayr, 2015. "Market Size and TFP in New New Trade Theory," CESifo Working Paper Series 5583, CESifo.
    14. Abdul A. Erumban, 2023. "The Falling Productivity in West Asian Arab Countries Since the 1980s: Causes, Consequences, and Cures," International Productivity Monitor, Centre for the Study of Living Standards, vol. 44, pages 89-119, Fall.
    15. Reitze Gouma & Robert Inklaar, 2023. "Capital Measurement and Productivity Growth Across International Databases," International Productivity Monitor, Centre for the Study of Living Standards, vol. 44, pages 67-88, Fall.
    16. Andrés Rodríguez-Pose & Vassilis Tselios, 2019. "Well-being, Political Decentralisation and Governance Quality in Europe," Journal of Human Development and Capabilities, Taylor & Francis Journals, vol. 20(1), pages 69-93, January.
    17. 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.
    18. Cheng,Wenyin & Fukao,Kyoji & Meng,Bo, 2024. "Global Value Chains: Unveiling the Nexus of Productivity and Welfare," IDE Discussion Papers 933, Institute of Developing Economies, Japan External Trade Organization(JETRO).
    19. Eduardo Davila & Andreas Schaab, 2024. "Welfare Accounting," Cowles Foundation Discussion Papers 2412, Cowles Foundation for Research in Economics, Yale University.

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    More about this item

    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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