Input substitutability and cross-country variation in sectoral linkages

Rishabh Sinha

doi:10.1016/j.econlet.2019.02.025

Abstract

Using cross-country data, I find the elasticity of substitution across sectoral inputs to be less than one for the broad sectors of the economy. Differences in relative prices account for a non-trivial share of the cross-country variation in sectoral linkages.

Highlights

Sectoral linkages – the extent to which goods from different sectors are utilized as intermediates in the production of sectoral goods, bear a systematic relationship with GDP per capita
If intermediates from different sectors enter production as complements, the higher relative price of services in developed countries will lead to the sector commanding a larger share of the aggregate intermediate expenditure seen in the data
The objective of this note is to examine if the elasticity of substitution across sectoral inputs differs from unity, making the price channel a factor in accounting for the cross-country variation in linkages

Summary

Introduction

Sectoral linkages – the extent to which goods from different sectors are utilized as intermediates in the production of sectoral goods, bear a systematic relationship with GDP per capita. The share of services in intermediate expenditure is higher in the developed countries. An interpretation that helps reconcile the cross-country variation is that distortions exist in the intermediate markets. Such analyses typically employ a production technology with a CobbDouglas (CD) association across sectoral inputs. If intermediates from different sectors enter production as complements, the higher relative price of services in developed countries will lead to the sector commanding a larger share of the aggregate intermediate expenditure seen in the data.. The objective of this note is to examine if the elasticity of substitution across sectoral inputs differs from unity, making the price channel a factor in accounting for the cross-country variation in linkages. Intermediates are most complementary in the production of services, while it is easiest to substitute across intermediates in the production of agricultural goods

Theoretical Framework and Data

Results

Conclusion

Parameter Constraints and Normalization