Working Paper: NBER ID: w23705
Authors: Javier Cravino; Samuel E. Haltenhof
Abstract: 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.
Keywords: real exchange rates; income per capita; sectoral input shares
JEL Codes: F31; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| GDP per capita (O49) | aggregate price level (E30) |
| sectorial differences in intermediate input shares (L69) | aggregate price level (E30) |
| sectorial technology differences (O14) | real exchange rates (F31) |
| capital shares across sectors (D33) | real exchange rates (F31) |
| GDP per capita (O49) | relative price of nontradables (F16) |
| real exchange rates (F31) | aggregate price of nontradables (C43) |
| GDP per capita (O49) | industry-level real exchange rates (F31) |