Accounting for Cross-Country Income Differences Revisited
Also known as Why I Do Not Believe in the Housing Theory of Everything: Development accounting is the search for proximate sources of cross-country income differences. This article describes how knowledge in this field has evolved over the two decades since the influential work of Caselli (2005). There have been large advances in the measurement […] The post Accounting for Cross-Country Income…
The article "Accounting for Cross-Country Income Differences Revisited" explores the advancements made in understanding the reasons behind income disparities between countries. This field, known as development accounting, has seen significant progress in measuring production inputs such as labor, physical capital, and human capital over the past two decades since the influential work of Caselli in 2005.
Recent advancements have led to an increased estimate of the contribution of inputs, particularly human capital, in determining GDP per worker differences. According to the authors, inputs now account for 55–70 percent of these differences, compared to 30 percent using the traditional approach. This shift highlights the growing importance placed on human capital in development accounting.
Another notable advancement is the departure from the Cobb-Douglas production functions, which previously bundled factors like management quality into total factor productivity (TFP). The literature has made strides in measuring these factors separately, providing a more nuanced understanding of their impact on productivity.
The review of the literature emphasizes the implications of these advancements, identifies areas where future research could be beneficial, and acknowledges the limitations of development accounting. The article is based on a new NBER working paper by researchers David Lagakos and Todd Schoellman.
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