DP4703 Accounting for Cross-Country Income Differences

Author(s): Francesco Caselli

Publication Date: October 2004

Keyword(s): development , technology , factor supplies

JEL(s): E20 , O10 , O20 , O30 , O40 , O50

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4703.asp

Why are some countries so much richer than others? Development Accounting is a first-pass attempt at organizing the answer around two proximate determinants: factors of production and efficiency. It answers the question ‘how much of the cross-country income variance can be attributed to differences in (physical and human) capital, and how much to differences in the efficiency with which capital is used?’ Hence, it does for the cross-section what growth accounting does in the time series. The current consensus is that efficiency is at least as important as capital in explaining income differences. I survey the data and the basic methods that lead to this consensus, and explore several extensions. I argue that some of these extensions may lead to a reconsideration of the evidence.