The Marginal Product of Capital

Abstract

Whether or not the marginal product of capital (MPK) differs across countries is a question that keeps coming up in discussions of comparative economic development and patterns of capital flows. Using easily accessible macroeconomic data we find that MPKs are remarkably similar across countries. Hence, there is no prima facie support for the view that international credit frictions play a major role in preventing capital flows from rich to poor countries. Lower capital ratios in these countries are instead attributable to lower endowments of complementary factors and lower efficiency, as well as to lower prices of output goods relative to capital. We also show that properly accounting for the share of income accruing to reproducible capital is critical to reach these conclusions. One implication of our findings is that increased aid flows to developing countries will not significantly increase these countries’ capital stocks and incomes. I. INTRODUCTION Is the world’s capital stock efficiently allocated across countries? If so, then all countries have roughly the same aggregate marginal product of capital (MPK). If not, the MPK will vary substantially from country to country. In the latter case, the world foregoes an opportunity to increase global GDP by reallocating capital from low to high MPK countries. The policy implications are far reaching. Given the enormous cross-country differences in observed capital-labor ratios (they vary by a factor of 100 in the data used in this paper) it may seem obvious that the MPK must vary dramatically as well. In this case we would have to conclude that there are important frictions in international capital markets that prevent an efficient cross-country allocation of capital. 1 However, as Lucas [1990] pointed out in his celebrated article, poor countries also have lower endowments of factors complementary with physical capital, such as human capital, and lower total