A Unified Theory of the Evolution of International Income Levels

Posted: 27 Jul 2008

See all articles by Stephen L. Parente

Stephen L. Parente

University of Illinois at Urbana-Champaign - Department of Economics

Edward C. Prescott

Arizona State University (ASU) - Economics Department; National Bureau of Economic Research (NBER)

Date Written: March 2004

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

Suggested Citation

Parente, Stephen L. and Prescott, Edward C., A Unified Theory of the Evolution of International Income Levels (March 2004). Available at SSRN: https://ssrn.com/abstract=1177482

Stephen L. Parente (Contact Author)

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Edward C. Prescott

Arizona State University (ASU) - Economics Department ( email )

Tempe, AZ 85287-3806
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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