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Federal Reserve Bank of Minneapolis
Research Department Staff Report 242
December 1997
Needed: A Theory of Total Factor Productivity*
Edward C. Prescott
Federal Reserve Bank of Minneapolis
and University of Minnesota
ABSTRACT
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.
*The views expressed herein are those of the author and not necessarily those of the
Federal Reserve Bank of Minneapolis or the Federal Reserve System.
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1820 1840 1860 1880 1900 1920 1940 1960
0
10
20
30
40
50
60
70
80
Numberofyears
Year reached 10 percent of 1985 U.S. level
1980
Figure 1
Years for GDP Per Capita To Grow From 10 to 20 Percent of the 1985 U.S. Level(a)
(a) Because of the wartime interruptions, I used the period that Austria went from .08 to .16 1985 U.S. percapita GDP, the period that Germany went from .05 to .10 of 1985 U.S. per capita GDP, and the period thatItaly went from .075 to .15 of 1985 U.S. per capita GDP.
Sources: Maddison (1991) and Summers and Heston (1991)
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49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94
49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94
400
200
50
100
25
Real Price and Output (1970 = 100)
Output
Real Price
Real Price and Output/Hour (1970 = 100)400
200
50
100
25
Real Price
Output/hour
Figure 2a
Figure 2b
U.S. Subsurface Mining, 1949 - 1994
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Source: Energy Information Administration, U.S. Department of Energy (1996).The chain linked GDP deflator is used to deflate coal prices for the 1959-94period. For years prior to 1959, I use the implicit price delator (source: EconomicReport of the President1978, p.262) after multiplying by factor 0.99. Thisprocedure gives the same real price for 1959 as does deflating by the 1992 dollar
chain linked deflator.
Real Price and Hours (1970 = 100)400
200
50
100
2549 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94
Real Price
Hours
Figure 2c
