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Relative Prices and Sectoral Productivity

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  • Diego Restuccia

    (University of Toronto)

  • Margarida Duarte

    (University of Toronto)

Abstract

Lack of comprehensive sectoral productivity data across a large set of countries has turned researchers to structural analysis using detailed international price data to infer cross country productivity at the sector level. Because the relative price of services is higher in rich than in poor countries (and rises with development), a standard interpretation of this observation in the literature is that cross-country productivity differences in the service sector are much smaller than in other sectors of the economy, in particular industry and tradable sectors. Using disaggregate price data from the International Comparison Program we show that the behaviour of the relative price of aggregate services is driven mainly by traditional services such as government, health, and education, but that for richer countries non-traditional services such as communication and transport and insurance and financial services gain in importance. We also show that the price of non-traditional services decreases with income and is much higher than that of traditional services, especially for poor countries. This pattern together with the reallocation across services account for the higher price of services in rich relative to poor countries. We study the importance of disaggregating the service sector for productivity implications at the sector level. Using both a simple development accounting framework and a model of the structural transformation in services, we find that cross-country productivity differences are very large in non-traditional services and at least as large as those in manufacturing. We argue with these results that development requires also an emphasis on solving the productivity problem in non-traditional services in poor countries.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1100.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1100

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  1. Ngai, L. Rachel & Pissarides, Christopher A., 2005. "Structural Change in a Multi-Sector Model of Growth," IZA Discussion Papers 1800, Institute for the Study of Labor (IZA).
  2. Margarida Duarte & Diego Restuccia, 2009. "The Role of the Structural Transformation in Aggregate Productivity," Working Papers tecipa-348, University of Toronto, Department of Economics.
  3. Martin Neil Baily & Robert M. Solow, 2001. "International Productivity Comparisons Built from the Firm Level," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 151-172, Summer.
  4. Margarida Duarte & Diego Restuccia, 2007. "The structural transformation and aggregate productivity in Portugal," Portuguese Economic Journal, Springer, vol. 6(1), pages 23-46, April.
  5. Echevarria, Cristina, 1997. "Changes in Sectoral Composition Associated with Economic Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 431-52, May.
  6. Marcel P. Timmer & Gaaitzen J. de Vries, 2009. "Structural change and growth accelerations in Asia and Latin America: a new sectoral data set," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 3(2), pages 165-190, June.
  7. Berthold Herrendorf & Akos Valentinyi, 2006. "Which Sectors Make the Poor Countries so Unproductive?," 2006 Meeting Papers 304, Society for Economic Dynamics.
  8. Dirk Pilat, 1996. "Labour Productivity Levels in OECD Countries: Estimates for Manufacturing and Selected Service Sectors," OECD Economics Department Working Papers 169, OECD Publishing.
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Cited by:
  1. Herrendorf, Berthold & Rogerson, Richard & Valentinyi, Akos, 2013. "Growth and Structural Transformation," CEPR Discussion Papers 9370, C.E.P.R. Discussion Papers.

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