Productivity and prices in Europe: micro-evidence for the period 1975 to 1990

Abstract

In the absense of frictionless trade, domestic productivity will be a major determinant of prices. Using repeated cross-sections of absolute prices of individual goods across European countries, I find that products of an industry tend to be cheaper in countries with higher productivity in that industry. Similarly, countries with higher productivity in manufacturing have lower prices for products of that sector, and will have a lower price level as long as the manufacturing sector is sufficiently large.