A formalisation and test of the factor productivity explanation of international differences in service prices

This paper extends and integrates, previous models of the determinants of international differences in the prices of services relative to tradable commodities. We provide a model capable of identifying the effects of differences in (total) factor productivity on service price differences separately from the effects of factor endowment differences. We propose a method for measuring these factor productivity difference effects and apply this to a sample of 60 countries in 1980. Our results provide support both for the ''endowment difference'' and ''productivity difference'' explanations suggesting that, in this context at least, the two hypotheses are complements rather than competitors.