Development accounting with intermediate goods

Do intermediate inputs help explain aggregate and relative productivity differences across countries? They do, based on new stylized facts on cross-country relative prices and input-output relationships. That evidence motivates a simple development accounting framework that distinguishes between goods and service industries on the one hand, and final and intermediate output on the other. The model diagnoses the impact of TFP on productivity, and yields the following results. Poorer countries are particularly inefficient in the production of intermediate relative to final output, but they are not necessarily inefficient in goods relative to service industries. They feature low measured labor productivity in goods industries because these are intensive intermediate users, and because intermediate TFP is relatively low. The elasticity of aggregate TFP with respect to sector-neutral TFP is large, in the range of 1.8 to 2.2.