Nber Working Paper Series Relative Prices and Relative Prosperity

helpful comments. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research. All rights reserved. Short sections of text not to exceed two paragraphs, may be quoted without explicit permission provided that full credit including ©notice, is given to the source. ABSTRACT The positive correlation between PPP investment rates and PPP income levels across countries is one of the most robust findings of the empirical growth literature. We show that this relationship is almost entirely driven by differences in the price of investment relative to output across countries. When measured at domestic prices rather than at international prices, investment rates are little correlated with PPP incomes. We find that the high relative price of investment in poor countries is solely due to the low price of consumption goods in poor countries. Investment prices are no higher in poor countries than in rich countries. These facts suggest that the low PPP investment rates in poor countries are not due to low savings rates or to high tax or tariff rates on investment. Poor countries instead appear to be plagued by low efficiency in producing investment goods and in producing exportables to trade for machinery and equipment.