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Relative Prices and Sectoral Productivity

Margarida Duarte and Diego Restuccia ()

Working Papers from University of Toronto, Department of Economics

Abstract: The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories. We document that many disaggregated service categories-such as transportation, communication, and finance-feature a negative income elasticity of relative prices, whereas the relative price of aggregate services is mostly driven by large expenditure categories in housing, collective government, and health that feature a positive income elasticity of relative prices. We also document a substantial reallocation of expenditures in services from categories with positive income elasticities (traditional services) to categories with negative elasticities (non-traditional services) as income rises. Using an otherwise standard multi-sector development accounting framework extended to include an input-output structure, we find that the cross-country income elasticity of sectoral productivity is large in non-traditional services (1.15), smaller in manufacturing (1.05) and much smaller in traditional services (0.67). Eliminating cross-country productivity differences in non-traditional services reduces aggregate income disparity by 58 percent, a 7.9-fold reduction in aggregate productivity differences. We also find that the heterogeneity between traditional and non-traditional services has a substantial impact on aggregate productivity and that the input-output structure is important in this assessment.

Keywords: Productivity; services; input-output structure; non-traditional services. (search for similar items in EconPapers)
JEL-codes: O4 O5 O11 O14 E01 E13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-tid
Date: 2019-01-06
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Working Paper: Relative Prices and Sectoral Productivity (2017) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2017) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2016) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2015) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2015) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2012) Downloads
Working Paper: Relative Prices and Sectoral Productivity (2011) Downloads
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