Endogenous Productivity and Development Accounting

47 Pages Posted: 27 Sep 2006

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Amartya Lahiri

University of British Columbia (UBC) - Department of Economics

Date Written: August 2006

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.

Keywords: cross-country income, productivity, vintage capital

JEL Classification: O11, F43, O33, O41

Suggested Citation

Armenter, Roc and Lahiri, Amartya, Endogenous Productivity and Development Accounting (August 2006). FRB of New York Staff Report No. 258. Available at SSRN: https://ssrn.com/abstract=932591 or http://dx.doi.org/10.2139/ssrn.932591

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Amartya Lahiri

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604.822.8606 (Phone)

HOME PAGE: http://www.econ.ubc.ca/alahiri/

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