A Unified Theory of the Evolution of International Income Levels

Abstract

This essay develops a theory of the evolution of international income levels. In particular, it augments the Hansen-Prescott theory of economic development with the Parente-Prescott theory of relative efficiencies and shows that the unified theory accounts for the evolution of international income levels over the last millennium. The essence of this unified theory is that a country starts to experience sustained increases in its living standard when production efficiency reaches a critical point. Countries reach this critical level of efficiency at different dates not because they have access to different stocks of knowledge, but rather because they differ in the amount of society-imposed constraints on the technology choices of their citizenry.

Keywords: Trading Clubs, Catch-Up, Transition to Modern Economic Growth, Aggregate Economic Efficiency, Capital Share

JEL Classification: E0, F4, O11, O19