Cross-Country Productivity Comparisons: The 'Revealed Superiority' Approach.

Economics

Further details

(with Ziv Bar-Shira and Israel Finkelshtain)

This paper proposes a novel non-parametric methodology for comparing total factor productivity (TFP) across countries and over time. It develops the principle of revealed superiority along the lines of Samuelson's principle of revealed preferences. Specifically, we compare the aggregate actual profits of all the producers in each country to the hypothetical profits they would have earned if, facing their own prices, they had employed another country's inputs and produced its output. We show that our procedure reveals the 'true' TFP ranking under relatively mild assumptions. Therefore, matching our ranking to previous analyses that measured TFP using explicit functional forms, we can test the validity of their assumed functional forms. In addition, we develop a test to check whether our assumptions are consistent with the data. We find that most of the countries in our sample pass this test. We apply our method by ranking a panel of the 25 richest economies relative to one another and over time and find that the U.S. enjoys the highest TFP whereas Singapore has the lowest.