Working Paper: CEPR ID: DP15600
Authors: Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Servén
Abstract: We show that the welfare of a countryís 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.
Keywords: productivity; welfare; TFP; Solow residual
JEL Codes: D24; D90; E20; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| total factor productivity (TFP) (D24) | welfare (I38) |
| capital stock per capita (E22) | welfare (I38) |
| expected present discounted value of TFP growth (O49) | welfare (I38) |
| growth in capital stock per person (O40) | welfare (I38) |
| total factor productivity (TFP) (D24) | expected present discounted value of TFP growth (O49) |