DP15600 Productivity and the Welfare of Nations

Author(s): Susanto Basu, Luigi Pascali, Fabio Schiantarelli, Luis Servén
Publication Date: December 2020
Keyword(s): productivity, Solow residual, TFP, welfare
JEL(s): D24, D90, E20, O47
Programme Areas: International Macroeconomics and Finance, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15600

We show that the welfare of a countryiÌ?s infinitely-lived representative consumer is summarized, to a first order, by total factor productivity (TFP), appropriately defined, and by the capital stock per capita. The result holds for both closed and open economies, regardless of the type of production technology and the degree of product market competition. 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. We use these results 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.