International value-added linkages in development accounting

A large portion of international income differences remains poorly understood. It is traditionally attributed to cross-country differences in total factor productivity, which cannot be measured directly. This column argues that the importance of total factor productivity has been overstated because differences in countries’ patterns of international linkages have been overlooked. Using input-output data for 40 countries, it shows how the assumption that economies are closed has led traditional development accounting to overestimate total factor productivity.