A Formalisation and Test of the Factor Productivity Explanation of International Differences in Service Prices

Abstract

This paper extends and integrates previous models of the determinants of international differences in the prices of services relative to tradable commodities. The authors provide a model capable of identifying the effects of differences in (total) factor productivity on service price differences separately from the effects of factor endowment differences. They propose a method for measuring these factor productivity difference effects and apply this to a sample of sixty countries in 1980. The authors' results provide support both for the 'endowment difference' and 'productivity difference' explanations suggesting that, in this context at least, the two hypotheses are complements rather than competitors. Copyright 1996 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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