The Composition of Capital and Cross-country Productivity Comparisons

The role of physical capital is typically found to be limited in accounting for differences in GDP per worker, but this result may be because capital is customarily assumed to be a homogenous unit. This assumption is misleading, as different types of capital assets have different marginal products and richer countries tend to invest more in high-marginal product assets. We take this perspective to a global dataset, the Penn World Table, to improve cross-country productivity comparisons. We show that, properly measured, differences in capital input can account for a greater share of income variation, but (total factor) productivity differences remain dominant.