The Relative Price of Services


  • Note: The research on which this paper is based is part of the World Input–Output Database (WIOD) project. This project is funded by the European Commission, Research Directorate General as part of the 7th Framework Programme, Theme 8: Socio-Economic Sciences and Humanities (Grant Agreement No. 225 281). In addition, financial support from the NSF Project “Integrating Expenditure and Production Estimates in International Comparisons” is gratefully acknowledged. We thank the World Bank for providing the underlying basic heading data from the 2005 ICP round and Robert Feenstra for providing quality-adjusted export and import unit values. We also thank participants at various seminars, two anonymous referees, and Robert Hill for helpful comments on an earlier draft.


Prices of GDP relative to the exchange rate increase with income per capita, which is known as the Penn-effect. This is generally attributed to services being cheaper relative to goods in poorer countries. In this paper we re-examine the Penn-effect based on a new set of PPPs for industry output. These are estimated in an augmented Geary–Khamis approach using prices for final goods, exports, and imports. The resulting multilateral PPPs cover 35 industries in 42 countries for the year 2005. We find large variation in relative prices of various services industries. In particular the Penn-effect appears to be mostly due to the rapidly rising output prices of non-market services. This seems related mainly to the high labor intensity of that sector.