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Endogenous productivity and development accounting

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  • Roc Armenter
  • Amartya Lahiri

Abstract

Cross-country data reveal that the per capita incomes of the richest countries exceed those of the poorest countries by a factor of thirty-five. We formalize a model with embodied technical change in which newer, more productive vintages of capital coexist with older, less productive vintages. A reduction in the cost of investment raises both the quantity and productivity of capital simultaneously. The model induces a simple relationship between the relative price of investment goods and per capita income. Using cross-country data on the prices of investment goods, we find that the model does fairly well in quantitatively accounting for the observed dispersion in world income. For our baseline parameterization, the model generates thirty-five-fold income gaps and six-fold productivity differences between the richest and poorest countries in our sample.

Suggested Citation

  • Roc Armenter & Amartya Lahiri, 2006. "Endogenous productivity and development accounting," Staff Reports 258, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:258
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    References listed on IDEAS

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    Cited by:

    1. Charles I. Jones, 2011. "Intermediate Goods and Weak Links in the Theory of Economic Development," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(2), pages 1-28, April.
    2. Charles I. Jones, 2008. "Intermediate Goods, Weak Links, and Superstars: A Theory of Economic Development," NBER Working Papers 13834, National Bureau of Economic Research, Inc.
    3. Jang-Ting Guo & Yutaro Izumi & Yi-Chan Tsai, 2015. "Resource Misallocation and Aggregate Productivity under Progressive Taxation," Working Papers 201502, University of California at Riverside, Department of Economics.
    4. Chang-Tai Hsieh & Peter J. Klenow, 2010. "Development Accounting," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 207-223, January.

    More about this item

    Keywords

    Productivity ; Wealth ; Income ; Capital;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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