Working Paper: NBER ID: w13834
Authors: Charles I. Jones
Abstract: Per capita income in the richest countries of the world exceeds that in the poorest countries by more than a factor of 50. What explains these enormous differences? This paper returns to several old ideas in development economics and proposes that linkages, complementarity, and superstar effects are at the heart of the explanation. First, linkages between firms through intermediate goods deliver a multiplier similar to the one associated with capital accumulation in a neoclassical growth model. Because the intermediate goods' share of revenue is about 1/2, this multiplier is substantial. Second, just as a chain is only as strong as its weakest link, problems at any point in a production chain can reduce output substantially if inputs enter production in a complementary fashion. Finally, the high elasticity of substitution associated with final consumption delivers a superstar effect: GDP depends disproportionately on the highest levels of productivity in the economy. This paper builds a model with links across sectors, complementary inputs, and highly substitutable consumption, and shows that it can easily generate 50-fold aggregate income differences.
Keywords: economic development; intermediate goods; productivity; income disparities
JEL Codes: O11; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| productivity of intermediate goods (E23) | overall economic output (E23) |
| low productivity in one sector (O49) | reduced output in interconnected sectors (E23) |
| complementarity among inputs (D10) | overall productivity (O49) |
| GDP (E20) | highest productivity levels in the economy (O49) |
| elasticity of substitution associated with final consumption (D11) | impact of productivity differences (O49) |
| distortions in resource allocation (D61) | large income differences (D31) |