Income Difference Among Countries

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Income Difference Among Countries

• Why are some countries poor and others rich?

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What accounts for the Differences

• Physical Capital rich countries have installed
  better and more physical capital.
• Labor Market Participation individuals in rich
  countries work more and harder.
• Human Capital workers in rich countries are
  better trained and have more education.
• Factor Productivity unmeasured factors
  contribute to higher productivity of labor and
  capital.

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Immigrants and Human Capital

• Immigrants provide some useful information about
  differences in human capital
• They come from different counties and thus may
  have different levels of human capital.
• But they all work in the same market and hence we
  have clean measures of productivity (earnings)
• The main problem is that immigrants are not a
  random sample of the home country population.

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Conclusions

• We thus conclude that a large fraction of
  observed difference in incomes among countries
  cannot be explained by easily measured production
  factors.
• That is a puzzling result since it seems to
  indicate that there are other factors that
  influence productivity or income levels which are
  often ignored.
• A plausible explanation is that differences in
  institutions, laws, regulations, and social norms
  may account for residual differences.
• There is thus much scope for using public
  policies to shape and influence these
  institutions, norms, and laws that have a large
  impact on the incentives that are associated with
  many economic activities.

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The Speed of Economic Development

• Thus far we have only taken a static,
  cross-sectional approach.
• However, there is also a lot of information in
  the dynamics of growth.
• It is interesting to ask the question whether the
  speed of economic development has changed
  recently.
• The following figure provides some interesting
  insights.

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Variation in Productivity

• Thus far we have focused on average productivity
  measures, ignoring differences within countries.
• In practice, there is heterogeneity in
  productivity among the different sectors and
  industries with a country.
• These differences are sometimes large, especially
  in developing countries.
• The following table compares the U.S. with India
  and China.

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