Accounting for Cross-Country Income Differences

Abstract

Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question "how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?" Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.

The Magnitude of the Task Ahead: Macro Implications of Heterogeneous Technology

“…Note that Gollin () does not conclude that these income shares are identical across countries, but that his data corrections result in considerable reduction in their variation and that there is no correlation between income and the remaining differences. Nevertheless, Gollin’s findings are typically taken to mean that under the reasonable assumption of constant returns to scale and the perhaps somewhat less reasonable assumption of perfect competition, cross‐country growth and levels accounting exercises can assume a common capital coefficient of 0.3 and focus their energies on chipping away at other dimensions of the “measure of our ignorance” (see Caselli, ; Hulten, ).…”

Firm Productivity and Institutional Quality: Evidence From Italian Industry

“…Development accounting exercises have shown that the observed per capita income differences across countries can be explained by both variations in production inputs (Caselli, ) and changes in Total Factor Productivity (TFP), i.e., the regression residual that Abramowitz called “the economists’ measure of ignorance.” An extensive empirical literature has emphasized the role of institutions in affecting both inputs (physical and human capital) and TFP, thus pointing out the existence of a further effect of institutions on per capita income (through TFP changes) beside the indirect effect operating through capital accumulation.…”

Misallocation and aggregate productivity across time and space

“…A broad consensus in the macro development literature is that, at the aggregate level, income differences across countries are accounted for mostly by TFP differences. This finding has been documented extensively in the literature, for instance Klenow and Rodriguez-Clare (1997), Prescott (1998), Hall and Jones (1999), Caselli (2005) and, more recently, Jones (2016). For instance, Jones (2016) performs a development accounting exercise that separates the contributions of physical capital intensity, human capital and TFP in accounting for GDP per worker differences across countries.…”