Explaining Product Price Differences Across Countries

42 Pages Posted: 9 Jul 2007 Last revised: 5 Sep 2010

See all articles by Robert E. Lipsey

Robert E. Lipsey

National Bureau of Economic Research (NBER) at New York (Deceased)

Birgitta Swedenborg

Center for Business and Policy Studies (SNS), Stockholm

Date Written: July 2007

Abstract

A substantial part of international differences in prices of individual products, both goods and services, can be explained by differences in per capita income, wage compression, or low wage dispersion among low-wage workers, and short-term exchange rate fluctuations. Higher per capita income is associated with higher prices and higher wage dispersion with lower prices. The effects of higher income and wage dispersion are moderated for the more tradable products. The effects of wage dispersion, on the other hand, are magnified for the more labor-intensive products, particularly low-skill services. The differences in prices across countries are reflected in differences in the composition of consumption. Countries in which prices of labor-intensive services are very high, such as the Nordic countries, consume much less of them. For some services, the shares of GDP consumed in high-price countries are less than 20 percent of the shares in low-price countries. Since these are services of very low tradability, the low consumption levels of these services imply low employment in them.

Suggested Citation

Lipsey, Robert E. and Swedenborg, Birgitta, Explaining Product Price Differences Across Countries (July 2007). NBER Working Paper No. w13239. Available at SSRN: https://ssrn.com/abstract=999034

Robert E. Lipsey (Contact Author)

National Bureau of Economic Research (NBER) at New York (Deceased)

Birgitta Swedenborg

Center for Business and Policy Studies (SNS), Stockholm ( email )

Skoldungagatan 2, Box 5629
S-114 86 Stockholm
Sweden

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