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Needed: A Theory of Total Factor Productivity

Staff Report 242 | Published December 1, 1997

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Edward C. Prescott Senior Monetary Advisor
Needed: A Theory of Total Factor Productivity


This paper evaluates the argument that differences in physical and intangible capital can account for the large international income differences that characterize the world economy today. The finding is that they cannot. Savings rate differences are of minor importance. What is all-important is total factor productivity. In addition, the paper presents industry evidence that total factor productivities differ across countries and time for reasons other than differences in the publicly available stock of technical knowledge. These findings lead me to conclude a theory of TFP is needed. This theory must account for differences in TFP that arise for reasons other than growth in the stock of technical knowledge.

Published in: _International Economic Review_ (Vol. 39, No. 3, August 1998, pp. 525-551)