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Relative Prices and Sectoral Productivity

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  • Margarida Duarte
  • Diego Restuccia

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 and we document that many disaggregated service categories feature a negative income elasticity of relative prices. We divide service industries into two broad categories based on the income gradient of its relative price: traditional services with positive income elasticities and nontraditional services with negative income elasticities of relative prices. Using an otherwise standard multisector development accounting framework extended to include an input–output structure, we find that the cross-country income elasticity of sectoral productivity is large in nontraditional services (1.15), smaller in manufacturing (1.05), and much smaller in traditional services (0.67). Eliminating cross-country productivity differences in nontraditional services reduces aggregate income disparity by 58%, a 7.9-fold reduction in aggregate productivity differences. Heterogeneity between traditional and nontraditional services also has a substantial impact on aggregate productivity.

Suggested Citation

  • Margarida Duarte & Diego Restuccia, 2020. "Relative Prices and Sectoral Productivity," Journal of the European Economic Association, European Economic Association, vol. 18(3), pages 1400-1443.
  • Handle: RePEc:oup:jeurec:v:18:y:2020:i:3:p:1400-1443.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvz022
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    5. Herrendorf, Berthold & Rogerson, Richard & Valentinyi, Ákos, 2014. "Growth and Structural Transformation," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 6, pages 855-941, Elsevier.
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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • E0 - Macroeconomics and Monetary Economics - - General

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