Tradability and Sectoral Productivity Differences Across Countries

Different models of economic development point to different sectors as important to understanding cross-country productivity differences. In this paper we argue that traded versus non-traded is a key distinction as we find that only productivity in the traded sector varies systematically with a country’s income level. In comparison, other two-way splits are less distinctive. We base our analysis on newly developed measures of sectoral relative prices and productivity for 84 countries across 3 years. These data incorporate several recent measurement advances allowing us to relax the common assumption of efficient labor markets, and we measure prices of sectoral value added instead of assuming that these are well-approximated by prices of final expenditure. These measurement improvements, as well as recognizing the tradability of certain services industries, are important to our main finding. These results emphasize the importance of reducing trade costs for enhancing productivity.