NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Relative Prices and Relative Prosperity

Chang-Tai Hsieh, Peter J. Klenow

NBER Working Paper No. 9701
Issued in May 2003
NBER Program(s):   EFG

The positive correlation between PPP investment rates and PPP income levels across countries is one of the most robust findings of the empirical growth literature. We show that this relationship is almost entirely driven by differences in the price of investment relative to output across countries. When measured at domestic prices rather than at international prices, investment rates are little correlated with PPP incomes. We find that the high relative price of investment in poor countries is solely due to the low price of consumption goods in poor countries. Investment prices are no higher in poor countries than in rich countries. These facts suggest that the low PPP investment rates in poor countries are not due to low savings rates or to high tax or tariff rates on investment. Poor countries instead appear to be plagued by low efficiency in producing investment goods and in producing exportables to trade for machinery and equipment.

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Document Object Identifier (DOI): 10.3386/w9701

Published:

  • Hsieh, Chang-Tai and Peter J. Klenow. "Relative Prices and Relative Prosperity," Proceedings, Federal Reserve Bank of San Francisco, November 7-8, 2003 ,
  • Hsieh, Chang-Tai and Peter J. Klenow. "Relative Prices and Relative Prosperity," American Economic Review 97(3): 562-585, June 2007

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