Income Differences, Productivity and Input-Output Networks

We study the importance of input-output (IO) linkages and sectoral productivity (TFP) in determining cross-country income differences. We find that while highly connected sectors are more productive than the typical sector in poor countries, the opposite is true in rich ones. To assess the quantitative role of linkages and sectoral TFP differences in cross-country income differences, we decompose cross-country income variation using a multi-sector general equilibrium model. We find that (i) IO linkages substantially amplify fundamental sectoral TFP variation but (ii) this amplification is significantly weaker than the one suggested by a simple IO model with an aggregate intermediate good.