Productivity and the Welfare of Nations

Recognition Program

Authors: Susanto Basu, Luigi Pascali, Fabio Schiantarelli and Luis Serven

Journal of the European Economic Association, Vol. 20, No 4, 1647–1682, August, 2022

We show that the welfare of a country’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 developed countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both developed and developing countries

This paper originally appeared as Barcelona School of Economics Working Paper 621
This paper is acknowledged by the Barcelona School of Economics Recognition Program