Real Exchange Rates, Income Per Capita, and Sectoral Input Shares

39 Pages Posted: 21 Aug 2017 Last revised: 9 Oct 2024

See all articles by Javier Cravino

Javier Cravino

University of Michigan; NBER

Samuel Haltenhof

University of Michigan at Ann Arbor - Department of Economics

Date Written: August 2017

Abstract

Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate productivity and income grow, so do wages relative to intermediate input prices, which increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity of the aggregate price level with respect to GDP per capita. The mechanism has stark implications for industry-level real exchange rates that are strongly supported by the data.

Suggested Citation

Cravino, Javier and Haltenhof, Samuel, Real Exchange Rates, Income Per Capita, and Sectoral Input Shares (August 2017). NBER Working Paper No. w23705, Available at SSRN: https://ssrn.com/abstract=3023103

Javier Cravino (Contact Author)

University of Michigan ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Samuel Haltenhof

University of Michigan at Ann Arbor - Department of Economics

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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