Quality change in the CPI

Consumer price indexes ; Prices

Why Development Levels Differ: The Sources of Differential Economic Growth in a Panel of High and Low Income Countries

Average income per capita in the countries of the OECD was more than 20 times larger in 2000 than that of the poorest countries of sub-Sahara Africa and elsewhere, and many of the latter are not only falling behind the world leaders, but have even regressed in recent years. At the same time, other low-income countries have shown the capacity to make dramatic improvements in income per capita. Two general explanations have been offered to account for the observed patterns of growth. One view stresses differences in the efficiency of production are the main source of the observed gap in output per worker. A competing explanation reverses this conclusion and gives primary importance to capital formation. We examine the relative importance of these two factors as an explanation of the gap using 112 countries over the period 1970-2000. We find that differences in the efficiency of production, as measured by relative levels of total factor productivity, are the dominant factor accounting for the difference in development levels. We also find that the gap between rich and most poor nations is likely to persist under prevailing rates of saving and productivity change. To check the robustness of these conclusions, we employ different models of the growth process and different assumptions about the underlying data. Although different models of growth produce different relative contributions of capital formation and TFP, we conclude that the latter is the dominant source of gap. This conclusion must, however, be qualified by the poor quality of data for many developing countries.

Income Originating in the State and Local Sector

In this paper we develop an accounting framework for the state and local sector which is consistent with the accounting framework for the private sector of the economy. We show that the public sector capital stock generates an imputed return which takes the form of a reduction in local taxes and that failure to recognize this income distorts the measurement of the output of this sector, confuses the debate over federal tax reform, and hides the distinction between general subsidies for capital formation. Our implementation of those accounts for the 1959- 1985 period indicates that current national income accounting procedures misstate the amount of income originating in the state and local sector; in recent years this misstatement has been on the order of $100 billion. We also show that the state and local sector is one of the more capital intensive sectors of the economy.