Working Paper: NBER ID: w17971
Authors: Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Serven
Abstract: We show that the welfare of a country's 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.
Keywords: Productivity; Welfare; Total Factor Productivity; Economic Well-being
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 |
|---|---|
| TFP growth (O49) | welfare of a representative consumer (D11) |
| change in expectations of TFP levels (O49) | welfare of a representative consumer (D11) |
| growth in capital per capita (O40) | welfare of a representative consumer (D11) |
| TFP levels (F16) | welfare differences across countries (I30) |
| capital intensity (E22) | welfare differences across countries (I30) |
| after-tax prices faced by consumers (H29) | TFP calculation (F16) |