The same insights that apply to the time series are relevant for the cross section: TFP needs to be de...ned using the prices perceived by households, and if the economy is open then other terms become relevant. Thus, tax rates, terms of trade, and foreign asset holdings also matter for cross-country welfare comparisons. As before, we can reduce the measurement complications enormously by using absorption rather than GDP as the de...nition of output in our householdcentric TFP measure.

These results show that we can perform interesting welfare comparisons using readily-available national income accounts data. We illustrate our methods using data for several industrialized countries for which high-quality data are available: Canada, France, Italy, Japan, Spain, the United Kingdom and the United States. We show the importance of ...scal considerations in constructing measures of welfare change over time. For example, if we assume that government spending is wasteful and taxes are lump-sum, the UK has the largest welfare gain among our group of countries over our sample period, 1985-2005, while Spain lags far behind due to its low TFP growth rate. Indeed, the US, a much richer country, has faster welfare growth than Spain under these assumptions. Allowing for distortionary taxation and assuming that government expenditures are chosen optimally, Spain has the highest welfare growth among all countries, with the UK a shade behind, and the US much further back.

However these welfare growth rates are country-speci...c indexes, and cannot be used to compare welfare across countries. We next apply our methodology to cross country-comparisons and show how these relative welfare levels evolve over time. In our benchmark case of optimal government spending and distortionary taxation, the US is the welfare leader throughout our sample period. At the start of our sample, we ...nd that France and the UK are closest to the US in terms of welfare, with France having a slight advantage over the UK. By the end of the sample, France and most of the other economies fall further behind the US in terms of welfare levels, with the two exceptions being Spain and the UK. Spain converges towards the US level of welfare in the ...rst several years of the sample, and then holds steady at a constant percent gap. The UK, by contrast, converges towards the US at a relatively constant rate, and by 2005 is within a few percent of the US level of per-capita welfare.

These measures have a clear interpretation because they are derived from a well-posed optimization problem. Starting from a precise statement of the household’s optimization problem also forces us to confront two issues in national income and welfare measurement. First, our derivation shows that “consumption”should be de...ned as any good or service that consumers value, whether or not it is included in GDP. Similarly, "capital" should include all consumption that is foregone now in order to raise consumption possibilities for the future. These items include, for example, environmental quality and intangible capital. Of course, both are hard to measure and even harder to value, since there is usually no explicit market price for either good. But our derivation is quite clear on the principle that the environment, intangibles and other non-market goods should be included in our measure of “welfare TFP.”We follow conventional practice in restricting the output measure for our TFP variable to market output (and the inputs to measured physical capital 5