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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. We document the behavior of relative prices and expenditure shares across two broad classifications of services: traditional services, such as health and education, featuring a rising relative price with development, and non-traditional services, such as communication and transportation, featuring a falling relative price. We find a strong reallocation of real expenditures from traditional to non-traditional services with development. Using a standard multi-sector model extended to incorporate an input-output structure, we show that cross-country productivity differences are much larger in non-traditional services (a factor of 106.5-fold between rich and poor countries) than in manufacturing (only 24.5-fold). Moreover, the productivity difference between non-traditional services and manufacturing is reduced by half when abstracting from intermediate inputs. Development requires solving the productivity problem in non-traditional services in poor countries.

Suggested Citation

  • Margarida Duarte & Diego Restuccia, 2016. "Relative Prices and Sectoral Productivity," Working Papers tecipa-555, University of Toronto, Department of Economics.
  • Handle: RePEc:tor:tecipa:tecipa-555
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    References listed on IDEAS

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    Cited by:

    1. Herrendorf, Berthold & Rogerson, Richard & Valentinyi, Ákos, 2014. "Growth and Structural Transformation," Handbook of Economic Growth,in: Handbook of Economic Growth, edition 1, volume 2, chapter 6, pages 855-941 Elsevier.
    2. Moro, Alessio & Rachedi, Omar, 2018. "The Changing Structure of Government Spending," MPRA Paper 86577, University Library of Munich, Germany.
    3. Murat Ungor, 2017. "Productivity Growth and Labor Reallocation: Latin America versus East Asia," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 25-42, March.
    4. Murat Üngör, 2016. "Did the rising importance of services decelerate overall productivity improvement of Turkey during 2002–2007?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 19(3), pages 238-261, July.
    5. repec:sbe:breart:v:37:y:2017:i:2:a:61801 is not listed on IDEAS

    More about this item

    Keywords

    Productivity; services; input-output structure; non-traditional services.;

    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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