Real Exchange Rates, Income per Capita, and Sectoral Input Shares
Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate productivity and income grow, so do wages relative to intermediate input prices, which increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity of the aggregate price level with respect to GDP per capita. The mechanism has stark implications for industry-level real exchange rates that are strongly supported by the data.
Javier Cravino thanks the International Economics Section at Princeton University for its hospitality and funding during part of this research. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Javier Cravino & Sam Haltenhof, 2020. "Real Exchange Rates, Income per Capita, and Sectoral Input Shares," The Review of Economics and Statistics, vol 102(1), pages 180-194. citation courtesy of