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 sec-
toral 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.