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Economic History Association

Capital-Goods Prices and Investment, 1870-1950 Author(s): William J. Collins and Jeffrey G. Williamson Source: The Journal of Economic History, Vol. 61, No. 1 (Mar., 2001), pp. 59-94 Published by: Cambridge University Press on behalf of the Economic History Association Stable URL: http://www.jstor.org/stable/2697855 . Accessed: 03/02/2011 13:08
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Capital-Goods Prices and Investment, 1870-1950


WILLIAM J. COLLINS AND JEFFREY G. WILLIAMSON The relative price of capital goods, an important component of the user cost of capital, has rarelybeen incorporatedinto comparative studies oflong-run capital accumulation. This article constructs and explores a data set for capital-goods and equipment prices covering the 1870-1950 period for 11 OECD countries. We document substantial differences across countries in the relative prices of capital goods, but also find convergence in those prices over time. Finally, we show that relative capitalgoods prices are strongly negatively correlated with investment rates.

he conventionalwisdom is that global financialmarketswere as well 1 integrated the 1890s as in the 1990s but thatit took severalpostwar in decadesto regenerate connectionsthatexistedbefore 1914. This view the has emerged froma variety testsforworldfinancial of capital-market integration,ranging fromthe correlation savingandinvestment of aggregates the to of dispersion security pricesandrealinterest rates.1 ultinateimportance The of theseconnections beenjustifiedin termsof the growthof nationsandinhas come convergence, so, when growthequations aplied to historical and are cross-sections fromthe Atlantic measures financial economy, of saving capacity andaccessto foreigncapitalareoftenincluded.2 However,financial capitalmarket integration cannot speakto theissueof investment growth and without makingan explicitconnection withthecost of capital goods. More specifically,per capitaincome growthdependsto a large extent uponcapitalaccumulation, accumulation and dependsuponinvestment, the invetment decisionhinges on a comparison capital'suser cost with its of the marginal product.Ignoringtax implications, strippeddown versionof the user cost of capitalcan be writtenas u = (PK /P)(r + c5) wherer is the real interestrate,PKthe priceof capitalgoods, P is the priceof output,and
T
The Journal of Economic History, Vol. 61, No. 1 (March 2001). ? The Economic History Association. All rights reserved. ISSN 0022-0507. William J. Collins is Assistant Professor, Department of Economics, Box 1819-B, Vanderbilt University, Nashville, TN 37235; phone: (615) 322-3428; e-mail: william.collins@vanderbilt.edu. Jeffrey G Williamson is Laird.Bell Professor, Department of Economics, Harvard University, Cambridge, MA 02138; phone: (617) 495-2438; e-mail: jwilliam@kuznets.fas.harvard.edu. We are grateful to Michael Bordo and Alan Taylor for the use of their interest-ratedata and to Antoni Estevadeordal for his data on trade in capital goods. We also thank Mario Crucini, Brad De Long, Kevin O'Rourke, PeterRousseau, Alan Taylor, two anonymous referees, and participants in the ASSA Cliometrics Session (1999) for their helpful comments. Williamson is also grateful for financial support from the National Science Foundation (grant SBR-9505656). 1 See Feldstein and Horioka, "Domestic Saving"; Edelstein, Overseas; Neal, "Integration"; and Obstfeld and Taylor, "Great Depression." 2Prados et al., "De Te Fabula Narratur?"; Obstfelt and Taylor, "Great Depression"; and O'Rourke and Williamson, Globalization, chap. 11.

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the for Therefore, a given rateof depreciation, user rate.3 c5thedepreciation cost of capital is determinedby a combinationof conditionsin financial (capital-goods rates)andinphysicalcapitalmarkets (interest capitalmarkets that the price of capital prices). Given these connections,it is surprising into goods has rarelybeen incorporated long-runstudiesof accumulation, integration.4 growth,and globalcapital-market First,the relativepriceof capital This could be an omissionthatmatters. has goods, and of machineryin particular, been featuredprominentlyin prices recentstudiesof postwargrowth,wheretheview that"lowequipment investof the to promotegrowthby increasing quantity equipment operate For ment"has gained some credence.5 example, Carlos Diaz-Alejandro, J. BradfordDe Long, and Alan Taylorall arguethatArgentina'simportprices and substitution policy in the 1940s and 1950s droveup equipment the Nonetheless, explorates.6 and drovedownaccumulation growth thereby experienceis morethe exceptionthantherule;quantirationof Argentina's tative studiesof pre-1960growthhave been nearlysilent on the issue. has integration the on capital-market international Second, literature long-run rates of oftenusingthedispersion interest markets, capital focusedon financial the of However, level andtrendin the measure the degreeof integration.7 as a in whichis detennined part of dispersion theusercost of capital, international fromwhatrealintertherelative goods,mighthavediffered priceof capital by hereforthepricecomest ratesalonesuggest.Inlightof thedatawe assemble and tales epochsof integrated disinteponentof usercosts,conventional about to up contribution incomeconvergence to 1914 and markets their capital grated somerevision. in periodmightrequire anddivergence the interwar prices By combiningthe nationalaccounts'time seriesfor capital-goods PWT),this articleexamwith datafromthe PennWorldTable(henceforth pricesrelativeto consumption-goods ines levels andtrendsin capital-goods nine fromthe Atlanticeconomy, pricesfrom 1870 to 1950 for 11countries: coversbothanearlyperiod The and Australia Japan.8 article,therefore, plus
3To elaborate on the stripped down version, write the user cost of capital as U = (PK/ P)(i+ a a PK/ PK) where, in addition to the notation introduced in the text, i denotes the nominal interest rate. The expression in the text can be derived from this one by assuming that the price of capital goods changes at the same rate as fbr allgoods (the inflationrate. Jorgenson ("CapitalTheory") illustrated thatthe user cost of capital could be characterized as a function oftheprice of capital goods, the rate of depreciation, the interest rate, and tax policies. The latter can be ignored for most of our period. There are exceptions that will be noted, Kuznets, "Quantitative Aspects," certainly being one. 5Thequote is fromDe Long and Summers,"Equipment,"p. 474. See also Jones, "Economic Growth"; Greenwood and Jovanovic, "AccountEasterly,"How Much Do Distortions";Lee, "IntemationalTrade"; ing"; and Greenwood, Hercowitz, and Krusell, "Long-Run." See Auerbach et al., "Reassessing" for a comment on the empirical fragility of the link between machinety investment and growth. and Dependence" "Onthe Costs." "External and Essays;De Long, "Productivity"; Taylor, 6 Diaz-Alejandro, 7 For example, Obstfeld and Taylor, "Great Depression." 8 See Summers and Heston, "Penn World Table Mark 5"; and Summers et al., Penn World Table Mark 5.6.

Capital-GoodsPrices and Investment

61

of economic globalization(up to WorldWarI) and the subsequent period of international disintegration.By doing so, it provides some historical perspectiveon the morerecentperiodof globalization. Moreover, taking by a longerview of the growthprocessthanmost of the recentliterature, the articlewill make a connectionbetweenthe economics of accumulation in the prewarperiod and the relativeeconomic standingof countriesin the postwarperiod. Thearticle threemaingoals.First,it constructs has measures therelative of priceof capitalgoodsandequipment acrosscountries overa longperiod. and No othersuch database extendsbackto 1870, so the information contained hereshouldbe usefulforeconomists historians and interested the long-run in evolutionof price structures, capitalaccumulation, growth.Second,the and articleinvestigatespotentialexplanations the observedtrendsover time for and for differencesacross countriesin these relative-price series. Third,it estimatesthe effect of differences relativecapital-goods in priceson investmentrates.Thearticle concludes withspeculation about how theconventional wisdom regarding"worldcapital-market integration" be enrichedby can wideningthe scope of inquiry includecapital-goods to prices. Wefindthattheinternational of dispersion relative capital-goods priceshas narrowedconsiderablysince 1870, especially for equipment,confirming We commodity-price trendin therelative convergence. also finda downward in price of equipment all countries priorto WorldWarI, a trendwhich is in confounded the overallcapital-goods priceindicesby a generally upward driftin construction prices.On the basis of the economichistoriesof Japan andtheUnitedStates,we argue thepriceratio'sdeclinereflectsrelatively that in fastproductivity advance theequipment-producing sector. we Furthermore, differencesin the relativeprice of capital goods arguethat cross-country in reflected differences productivity levels andskillendowments, we find and thatcountrieswith high overalltariffrateshad relativelylow capital-goods prices. Finally,we show that countrieswith relativelyhigh capital-goods low pricesundertook relatively ratesof investment, implyingthatsuchprice differences important had growthimplications.
THE DATA

Capital-goods price indicesunderliethe real investmentseries of all national accounts. Because the overall capital-goodsprice series combine equipment priceswiththoseof othercapitalgoods, andbecausethe existing literature emphasizesthe connectionbetween equipmentinvestmentand we have made an effortto extractseparate growth, price series for equipment where possible. For comparison,we have also extractedbuildingconstruction price series. All togetherwe have price series for Australia,

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Canada, Denmark, Finland, Germany,Italy, Japan, Norway, Sweden, GreatBritain,andthe United States.9 Appendixdescribesthe sources The andconstructionof these series. For each countrya relativeprice index is formed by dividing the capital-goodsprice index by the consumptiongoods price index.'0The resultingseries tell us how this relativeprice has changed over time within each country,but they do not tell us anything aboutdifferencesin relativeprices across countries.For example, we can tell thatthe price of investmentgoods relativeto consumergoods fell in Japanand rose in the United States from the 1870s to the 1950s, but we cannottell whetherthe relativeprice of capitalgoods in the United States was high or low comparedto thatin Japanat any point in time. To do so, we need to establish a cross-countrybenchmark.The earliest year for which this is possible is 1950, a yearfor which a purchasing-power parity price level is reportedby the PWT for investmentand consumptionfor each country.The benchmark permitsa doublecomparisonsimilarto that made by CharlesJones for the postwarperiod:we observe whether the price of capitalgoods relativeto the price of consumptiongoods in a particularcountryis high or low comparedto the same ratio in other countries.1 Thus,we can say somethingaboutthe relativecost of capitalgoods between countriesas well as over time. the Unfortunately, PWT does not provideprice series for capital-goods components,and at the same time it is evidentthatthe producer-durables price may differ substantially from the overall capital-goodsprice. This impliesthatthe 1950 PWTfiguresfor overallinvestment-goods prices are probablynot reliable approximations equipmentor machineryprices. of Instead,we taketheproducer-durables consumer-goods and pricedatafrom the UnitedNations'International for Comparison Program 1980andextend these prices back to 1950 by using the producer-durables consumerand goods price indices implicitin the OECDcountrynationalaccounts.'2

9 We would like to include more countries in the sample, but most do not have long and detailed national accounts stretching back to the nineteenth century. 10Consumption goods are chosen for the comparison rather than the overall GDP deflator because the investment goods index is included in the GDP deflator. Greenwood, Hercowitz and Krusell, "Long-Run" and Greenwood and Jovanovic, "Accounting" also relate capital goods prices to consumption goods prices. Furthermore, Jones ("Economic Growth," p. 361) shows that the choice does not matter for the 1960-1985 period. Jones, "Economic Growth." 12 specifically, we take the 1980 benchmarks from United Nations (1987), and then we calculate the implicit price deflators from 1950 to 1980 using the nominal and real producers durables investment series in OECD, NationalAccounts Statistics 1950-1968 and NationalAccounts: Detailed Tables 1964-1981. We have not tried to establish such benchmark estimates for the building series. Unlike Gordon, Measurement, we do not attempt to make quality adjustments to the reported national accounts price series. Based on Gordon's findings, such an adjustnent would almost certainly strengthen the findings in this article.

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63

Admittedly,this is not an ideal measureof relativecapital-goodsprices overtime or acrosscountries, SimonKuznetspointedout long ago.13 as The nationalaccountscapital-goods priceseriesareoftencombinations input of prices ratherthanactualobservations capital-goods of prices, as discussed in the Appendix. Consequently, they probablymismeasureproductivity advancewithinthe capital-goods sector.Furthermore, methodsof price the estimationarenot identicalacrosscountries,andso we cannoteven expect thatthe biases workthe same way andto the same extentin every country. Finally,using a single benchmark anchortime series runningback to to 1870 could producemisleadingcomparisons.14 farther travelfrom The we the benchmark, less certainour estimatesbecome. the Nevertheless,afteremployingsimilarnationalaccountsprice series almost fortyyears ago, RobertGordonobservedthat"Todenythe existence of these differential price trendsis to denythe validityof the deflatedestimatesof the componentsof GNPon whichwe all so heavilyrely.""5 is no It surprisethathistoricalnationalaccountsdataarequiteimperfect,and so it is clearthatwe mustproceedwith caution.At the sametime, it seems foolish to postpone the explorationof potentiallyimportantdeterminants of long-termeconomicgrowthsimplybecausethe dataarenot ideal.Until the next roundof revisionof historicalnationalaccounts(andtheirunderlying price series) and the appearance comprehensive of cross-country capitalgoods price datafor the nineteenth the century, comparisons makehere we rely on the best evidencewe could assemble.
THE EVOLUTIONOF RELATIVE CAPITALGOODS PRICES, 1870-1950

Table 1 documentsthe movementsin capital-goodsprices relative to with each series consumer-goods prices over 80 years,countryby country, set equalto 100 in 1900-1904. PanelA reports quinquennially the averaged relativepriceof all capitalgoods (equipment structures) each counand for the tryfrom 1870 to 1950. PanelB reports relativepriceof equipment alone for a somewhatsmallersample (data are not availablefor Australiaand trendsin the relativepriceof buildinginvestFinland).PanelC documents ment for comparison with those in equipment prices. Panel A reveals that the relativeprice of capital goods clearly did not trendatthe samerate,or even in the samedirection,in all countries. Australia, Canada, Denmark,Sweden,andthe United Statesall had a rising relative priceup to WorldWarI, butsome others,especiallyJapan, experienced a decline in the relative price of capital goods despite the fact that
13

Kuznets,"Quantitative Aspects,"p. 15.

14 See Nuxoll, "Differences"; andDowrickandQuiggin,"True for Measures," considerations the of

problemsassociatedwith intertemporal international and pricedata.


" Gordon, "Differential Changes," p. 937.

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1950 1895-99 1880-84 1905-09 1890-94 1875-79 1900-04 1885-89 1870-74 1945-49 1930-34 1915-19 1900-04 1885-89 1870-74 Year 1940-44 1925-29 1910-14 1895-99 1880-84 1935-39 1920-24 1905-09 1890-94 1875-79

164.83 114.17 124.46 100.00 154.37 124.38 125.82 95.49 92.65 70.67 88.69 141.60 123.30 99.14 80.16 75.61 91.20

AUS

81.54 106.43 126.49 100.00 112.56 125.83 104.84 129.73

118.31 105.84 110.86 95.14 99.05 91.98 89.51 113.21 100.44 110.79 100.73 96.76 100.00 94.22 91.45 86.63

CAN

97.01 94.81 81.5480.86 84.92 78.27 99.87 100.00

110.43 116.96 102.03 104.29 101.12 124.79 114.39 112.19 101.86 92.17 80.69 91.18 87.84 100.00 90.86 87.37

DEN RELATIVE

PRICE FIN 156.17 124.52 102.62 98.73 102.81 87.89 92.18 127.66 111.58 89.75 137.80 110.04 88.06 100.00 99.02 88.35 Panel 89.39 OF A: Panel B:

- - Relative CAPITAL 93.49 91.75 79.1189.88 100.00 88.47 84.40 135.29 104.99 97.48 100.55 93.85 100.00 93.47 94.42 84.53 98.05 95.12 86.76 116.15 GER 89.64 Relative Price TABLE Price of 1 GOODS, of All ITA 103.67 90.22 95.15 104.26 92.34 52.31 93.99 105.63 99.50 88.09 99.05 104.80 95.88 100.00 88.30 114.41 78.68 88.24 95.43 128.66 100.00 93.13 95.38 102.02 101.53

Capital Equipment
-

90.76 111.80 139.92 127.32 228.76 100.00 138.91

93.84

78.91 95.73 81.09 100.00 126.21 85.08 80.93 100.9491.58 114.46 105.26 115.46 151.42

1870-1950: Goods JAP (1900-1904 =

119.71 94.30 99.12 103.99 116.54 100.00 98.66 102.72

129.63 93.08 84.27 131.22101.61 97.20 92.93 98.28 122.37 85.50 112.71 97.09 100.00 94.46 102.24 98.35

NOR 100)

96.79 98.89 97.58 106.73 100.00 94.20 101.29 142.44

109.44 121.94 116.64 98.76 97.37 92.58 89.01 112.39 117.17 123.06 100.00 111.60 107.65 99.75 90.01 90.71 84.91

SWE

96.67 96.24 101.29 118.30 100.00 99.57 109.65 122.07

102.98 78.15 87.89 98.38 100.00 86.05 105.99 82.83 77.64 97.45 96.02 98.45 96.21 102.73 96.73 99.36 106.83

UK

95.39 95.25 95.72 105.24 100.00 89.87 99.70 114.89

131.54 120.90 110.67 100.65 90.97 93.75 90.00 120.30 119.76 106.13 100.00 93.89 91.08 122.04 106.98 99.55 96.15

US

Capital-GoodsPrices and Investment

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1950
1945-49 1930-34 1915-19 1900-04 1885-89 1870-74 1935-39 1920-24 1905-09 1890-94 1875-79 1940-44 1925-29 1910-14 1895-99 1880-84

1950
1945-49 1930-34 1915-19 1935-39 1920-24 1940-44 1925-29 1910-14Year

AUS

121.61 115.71 129.69 114.34 118.61107.30 96.17 86.80 78.76 126.82 111.98 -102.41 91.39 82.35 75.76 100.00

76.40 83.76 75.75 80.69 86.47 74.91 91.70 75.99 CAN

138.31 128.27 114.81 101.21 88.75 78.22 86.37 141.19 126.77 115.36105.18 99.62 87.66 85.04 100.00

131.88 122.59 134.96 116.06 124.0794.84 DEN 100.37

Panel C:

Panel FIN B:

Relative 112.63 95.44 100.00 97.11 94.17 117.64 105.75 109.65 98.15 95.48 81.09 105.46 88.79 89.52 Price of
-

Relative 85.57 86.36 90.44 86.55 GER Price 1 of TABLE

121.01 98.20 103.8298.62 100.00 99.34 98.20 68.83 124.80 85.92 98.45 102.93101.29 100.72 102.14 Building 57.63 90.83 115.8092.17 ITA 96.84 104.49 continued 73.18 82.17 87.70 98-.41 132.56Equipment

101.31 92.51 94.90 94.57 95.28 113.57 82.61 89.70 117.8686.29 100.00 107.67 100.50 107.81

Investment JAP 59.85 61.76 51.20 104.88continued 56.43 64.05 76.46

145.35 109.34 118.90102.53 98.35 88.30 89.90 135.97 98.72 125.30104.28 92.92 84.39 81.88 100.64 100.00

105.61 79.12 77.61 112.69 73.21 92.73 89.45 NOR 94.49

157.91 170.63 107.1198.83 96.57 87.37 73.23 155.83 151.86 157.26 161.25 135.5599.12 100.00 91.30 84.97 87.76

84.65 90.35 76.22 156.14 86.34 88.61 73.99 97.11 99.45 SWE

143.91 103.68 105.0499.11 100.00 96.01 97.93 144.02 99.36 107.6194.48 99.44 96.87 99.57 109.55 100.85 96.80

96.55 101.09 82.18 70.90 94.94 86.66 69.99 75.60 97.74

UK

176.55 139.38 112.81104.11 94.50 90.41 76.72 170.66 128.43 94.18 106.65 89.65 84.77 75.45 142.54 119.08 100.00

107.01 109.79 106.46 115.37 116.20 105.2097.67 120.59 101.65

US

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TABLE 1 - continued Notes: The figures represent the price of capital goods relative to consumption goods in each country. These prices are drawn from each country's national accounts. Each series is scaled to equal 100 in 1900-1904. Due to data limitations, Japan's figure for equipment in the 1950 row is actually for 1952. Sources: National accounts sources are cited in the Appendix.

a late-nineteenth-century investmentdemandboom in Japanshould have tended,ceteris to paribus, increasethe relativepriceof capitalgoods there. Panel B, however, shows that every countryin our sample experienceda declinein the relativepriceof equipment to 1914. Thisubiquitous up downwardtrendin the relativepriceof equipment leveled off or reverseditself in most countriesduringthe tumultuous interwar period,Italybeing the major exception with a continuingdownwarddrift.Unlike the relativeprice of the rose everywheredurequipment, relativepriceof buildingconstruction ing the periodunderstudy.This upward trendtendsto offset the downward drift of the equipmentprices when the series are combinedin the overall the capital-goodsprices index. Consequently, throughout article, we are carefulto distinguishthe findingsbased on the overallcapital-goodsprice series fromthose based on the equipment price series. The overallcapitalgoods price samplehas the benefitof being larger, the equipment-price but series is more in line with the literatureemphasizingthe importanceof machineryinvestmentto growth. Whatcan be said aboutthe variancein relativepricesacrosscountriesat any given point in time? Comparedto consumptiongoods, where were capitalgoods relativelycheap,and where were they relativelyexpensive? whatweretheimplications capitalaccumulation growth? for and Ultimately, Table2 combinesthe time-seriesdatafor all capitalgoods and equipment fromTable1 with the cross-national benchmarks 1950 describedprevifor ously to provide international relative-pricecomparisons.All figures in Table2 are expressedrelativeto the United Statesin 1950. In 1950onlyGermany Finland lowerrelativecapital-goods and had prices had thanthe UnitedStates(PanelA), andonly Canada lowerrelativeequipmentprices(PanelB). Despiteits spectacular capital-goods pricedeclineup to WorldWarII,Japan hada muchhigherrelativepriceof capitalgoods still 75 thanthe United States,approximately percenthigher.Ignoringinternational financialcapitalmobility,Japanwould have requireda savings rate 75 percenthigherthanthat of the United Statesto make the same real investmentin its productivecapacity. Thus,Japan'shistoricallyhigh savings ratehas hadto compensate its high relativepriceof capitalgoods. Given for the largeliterature concerning Japan'sunusuallyhigh savingrate,it is surprisingthatscholarshave failedto stressthe relativedearnessof the capital goods financedwith those savings."6
6 OhkawaandRosovsky, "Saving." Japanese;andDeBeverandWilliamson,

Capital-GoodsPrices and Investment


1950

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Year

1935-1939 1915-1919 1895-1999 1875-1979 1930-1934 1910-1914 1890-1994 1870-1974 1905-1909 1885-1989 1895-1999 1875-1979 1945-1949 1925-1929 1905-1909 1885-1989 1890-1994 1870-1974 1940-1944 1920-1924 1900-1904 1880-1984 1900-1904 1880-1984

111.07 112.36 147.18 137.80126.44101.95 111.1385.27 82.73 63.1079.19 110.10 88.53 89.30 71.58 67.5181.44

AUS

98.56 94.68 97.85 92.19 89.4884.76 94.88 99.48 123.10 103.60 106.80 119.40 115.80108.4098.28 108.50 93.09 96.92 90.0087.58 77.36101.00 120.00 110.80

CAN

98.51 100.50 102.70 99.62 89.5186.08 112.70 110.50 100.40 90.80 79.5089.82 108.80 133.40 108.80 133.20 122.9086.54 115.20 126.50 104.40 129.40 113.30 107.90

DEN

RELATIVE
-

74.56 67.38 60.38 47.65 53.42 55.63 53.58 47.81 Panel 84.50 69.08 59.54 55.53 48.56 54.11 48.3747.56 49.88 Panel B:
-

FIN

A:
-

127.50 120.60 122.60 Relative 136.30 107.90 184.50 85.37 125.10 115.10

RelativeCAPITAL-G 76.31 81.32 72.88 70.5494.44 GER 1 79.73 77.34 76.00 76.77 Price ABLE of L Price PRICES All of ITA 117.23 116.09 119.00 111.88 109.17 103.27 119.61 285.30 248.30 314.80 275.20 243.00 286.90 108.3061.33 110.18 150.83116.65 111.82 122.86 263.80 261.90 92.24 103.44 123.83 Capital 1870-1950: Equipment Goods (US JAP= 147.45 188.62 186.87 235.85 284.50 399.10 717.20 313.50 435.50 350.50 438.70 151.24 151.53 213.89 196.69 175.30 158.98 178.90 171.12 215.77 282.95 100 in 79.26 81.76 68.74
-

111.40 116.60 141.40 118.10 122.90 137.70 103.60 74.40 67.35 104.9081.21 78.6075.50 81.71 117.10 121.40 97.80 68.33 90.08 77.60 79.92 77.68 74.2778.54

1950) NOR

119.88 111.09 108.44 101.02 164.60 160.20 181.50 170.00 165.90 242.20 121.90124.28130.49 137.05109.99 100.24 99.13 168.10 172.20 111.36 103.10 94.56 125.16 135.80 129.89

SWE

120.83 91.70 103.13 146.20 150.60 184.60 151.20 153.20 178.90 124.40100.96 91.09 114.34112.66 113.49 120.54 145.60 165.80 97.19 115.44 115.52 116.59 117.34 112.89 125.34

UK

86.68 77.90 86.41 99.58 82.6082.56 82.96 91.23

91.45 91.91 81.3380.67 76.52 73.09 71.38 69.24 100.0092.77 91.04 84.1375.68 76.02 69.16 71.27 68.42

US

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Collins and Williamson

in

of each 1950 Year the Notes: reported Sources: however. series The benchmark 1945-1949 1925-1929 1940-1944 1920-1924 1935-1939 1915-1919 1930-1934 1910-1914 International So, equipment figure is over Appendix. thethese figures for Summers time et 1950 is 1950 show al.,estimated AUS is Comparison the by figures Penn in actually national-account Program determined relative World in CAN 76.56 82.04 71.08 87.01 72.09 72.49 79.47 71.88 Panel by series B multiplying theprice Table;calculated of are price relative forcombination to capital Norway's DEN United 175.91 163.53165.50 180.02 154.83133.90 126.50 derived 1952 with theseries of goods figure theusing in Nations, United that by (relative the Panel FIN theto OECD each B: States World the in ratio country's of national country benchmark 1950 Relative theUnited forfor GER TABLE national 123.31 121.06 116.67117.75 118.01 Price Comparisons; States accounts Panel compared of 2relative in in and to A. producers accounts. the price 1950). The ITA current of 201.38241.35270.78364.76 226.12158.61249.94318.67253.65 OECD, continued and Penn durables relative EquipmentSweden and World price did investment Internationally - JAP of not 189.81 193.63160.53328.83 continued 176.88200.82239.69 Table goods constantprices NationalAccounts capital in does consumption from notcomparable (1970 participate goods in 1980 NOR Sweden pricesprice 124.77 93.47 91.69 133.14 in 111.63 86.48 109.55105.68 and the the and back include from data ICP to 1983). in the from United separate Norway 1950. SWE the 143.92153.60129.59265.46 146.79150.66125.80165.10169.08 in 1980, 1980 price States National Due Penn and 1950 to report in so of its data 1950. accounts the World UK information 146.03124.28107.23143.59 The 152.88131.07105.86114.35147.83 (reported 1950 forTable in United sources limitations, are relative arePanel movement used US A). Japan's to cited price Nations' of 100.00104.5295.16 91.19 84.65 equipment, 92.75 100.7188.11 92.28

Capital-GoodsPrices and Investment

69

Overthe 80 yearsas a whole, Australia,Canada, Denmark,Italy,Japan, Sweden, andthe United Kingdomall appearto have had relativelyexpensive capitalgoods, implyinga relativelydisadvantageous pricestructure for capitalaccumulation. Japan,Sweden,andthe UnitedKingdomcarriedthe heaviest burdens.Finland, Germany, Norway, and the United States all appear havehadrelativelycheapcapitalgoods,implyinga favorable to price structure capitalaccumulation. impactof these differencesin price for The structure ratesof capitalaccumulation be exploredlater,but this is on will a good time to remindthe reader it is the relativepriceof capitalgoods that we are describing;consequently, differencesin consumption-goods prices may matteras much as differencesin capital-goodsprices in explaining differencesin the ratio. cross-country The relative price of equipmentdeclined in each of the nine sampled countriesup to WorldWarI, butthe declinewas muchsteeperin some than others;those with very expensiveequipment relativeto consumergoods in the 1870s experienced steepestrelativepricedeclinesupto WorldWarI. the As a result,the between-country spreadin relativepricesjust priorto World WarI was farsmallerthanin the late 1870s.At the extremesof the distribution, in the 1870s the relativeprices of equipmentin Japanand Italywere 7.9 and 3.5 times thatof the UnitedStates,but by WorldWarI those ratios had fallen to 2.8 and 3.0. The convergencephenomenonis illustratedin FiguresIAand 1Bwherethe changein the relativepriceof capitalgoods or for equipment each countryover ten- to 15-yearperiodsis graphedagainst the level of the price at the beginningof the period.This beta-convergence may havebeen drivenby trade'sequalization pricesacrosscountries,by of simplemeanreversionfromtimes of unusually high or low relativeprices, by the convergenceof productivity levels or skill endowmentsacross the countriesin the sample,or by some combination all three.17 of For the full distribution relativeprices,Table3 reportsthe coefficient of of variation from 1875 to 1990. Clearly, therehas been sigma-convergence for capital-goodsprices in the OECDfor morethana century.Even when Japanis excludedfromthe sample,the dispersionof both relativecapitalgoods pricesandrelativeequipment priceswere abouthalf as largein 1950 as in 1870, andthe epochs of big declinein the dispersionof capital-goods prices were 1885-1895, 1945-1950, and 1965-1985.18During the two

17Beta convergence occurswhenplaceswith relatively high initialvaluesof some variabletendto have relativelysmallincreasesin thatvariable overtime.Sigmaconvergence occurswhen the dispersion of a variable'svalues acrosscountriesfalls over time. We borrowthe termsfromthe empirical growthliterature (Barroand Sala-i-Martin, Economic Growth). 18T magnitude the relativepricechangein Japantendsto dominate of the changein the overall and dispersion, so we calculate dispersion the statistics bothwithandwithoutJapan. Eitherway,there is clearevidenceof a decline in pricedispersionoverthe past century.

70
.5 S

Collins and Williamson


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CHANGEIN THERELATIVE PRICEOF CAPITAL GOODSAND INITIALPRICE Notes:Eachcountry'snameis abbreviated with its firstletter,exceptforthe UnitedStates,"US,"and in the UnitedKingdom,"UK."The number parenthesis aftereach countryabbreviation the figure in denotesoneofthefollowingtimeperiods: 1870-1885,2) 1885-1900,3) 1900-1913,4) 1913-1929, 1) have dataavailableat the beginningof everyperiod. 5) 1929-1939, 6) 1939-1950. Not all countries The x-axis measuresthe price level at the beginningof the period,whereasthe y-axis measuresthe line thesepoints percentage changein thepricelevel overtheperiod.TheOLSregression fittedthrough = has the slope = - 0.21 (t-statistic 3.15). Sources:See the Appendix.

world wars, when internationalcommodity markets disintegrated,the capital-goodsprice dispersionfigures rose in six out of eight cases in Table 3 (four columns and two wars), the puzzling exception being for between 1940and 1945.Between 1910and 1915the equipmentequipment price disperprice dispersionrose from 0.44 to 0.54 andthe capital-goods sion rose from 0.29 to 0.31 beforejumpingto 0.43 in 1917. DuringWorld WarII, the dispersionmeasurefor relativecapital-goodsprices rose from 0.25 to 0.43 between 1940 and 1945.19Thus,the 1910-1950 periodof war, autarky,and de-globalizationslowed down the process of price convergence, but the convergencetrendresumedstronglyafter 1960. Forthe sakeof comparison, is worthnotingwhathappened the interit to of national of dispersion realinterest rates,theothercomponent theusercost
'9Thesecomparisons inexact the leavethesanple during wars.However, are becausesomecountries

we constructed and coefficientof variation timeseriesforsamplesthatalwaysexcludethosecountries foundthatthe rise in the dispersionis not merelythe resultof changesin samplecomposition.

Capital-GoodsPrices and Investment


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FIGURE lB

CHANGE IN THE RELATIVE PRICE OF EQUIPMENT AND INITIAL PRICE Notes: The x-axis measures the price level at the beginning of the period, whereas the y-axis measures the percentage change in the price level over the period. Periods are the same as in the notes to Figure IA. The OLS regression line fitted through these points has the slope = -0.17 (t-statistic = 2.64). Sources: See the Appendix.

of capital.MauriceObstfeldand Taylorobservethatthe dispersionof real interestratesfor ten countriesfell slightlybetween 1885 and 1914,jumped upwardduringWorldWarI, declined somewhatduringthe 1920s before rising again in 1930s and reachinga peak in the mid-1940s.20 From that peak, the dispersiondeclineduntil 1960, and despitethe much ballyhooed financial globalizationsince then, the dispersion of real rates had not changedby muchup to the mid-1990s.Ultimately, thismeasure,internaby tional financialmarketsappearto have been as well integrated the early in In contrast,our evidence on relativecapital-goods 1900s as they are now. pricessuggeststhatthe dispersionof relativecapital-goods priceswas subin stantiallynarrower the 1980s than at the beginningof the 1900s. Thus, with wereprobably betterintegrated far compared the 1880s,capitalmarkets in the 1980s thanthe financialevidencealone suggests.
PRICEOF CAPITALGOODS EXPLAININGTHE RELATIVE

In a worldof perfectlyintegrated markets whereall goods are commodity and tradable transportation arezero,the relativepriceof capitalgoods costs
20 Obstfeld andTaylor, "Great Depression."

72

Collins and Williamson

TABLE 3 COEFFICIENT OF VARIATION (CV) OF THE RELATIVE PRICE OF CAPITAL GOODS 1875-1950 Capital Goods Full Sample CV 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 0.60 0.35 0.45 0.41 0.46 0.33 0.30 0.29 0.31 0.31 0.25 0.27 0.23 0.25 0.43 0.21 0.20 0.22 0.17 0.12 0.13 0.11 0.09 0.10 N 11 11 11 11 11 11 11 11 9 9 11 11 11 9 8 11 11 11 11 11 11 11 11 Capital Goods w/o Japan CV 0.26 0.26 0.35 0.22 0.19 0.21 0.19 0.21 0.23 0.23 0.21 0.25 0.20 0.17 0.43 0.15 0.16 0.16 0.16 0.12 0.13 0.11 0.09 0.10 N 10 10 10 10 10 10 10 10 8 8 10 10 10 8 7 10 10 10 10 10 10 10 10 10 Equipment Full Sample CV 0.88 0.56 0.52 0.56 0.56 0.43 0.48 0.44 0.54 0.40 0.45 0.38 0.36 0.32 0.24 0.31 N 9 9 9 9 9 9 9 9 7 7 9 9 9 6 5 8 Equipment w/o Japan CV 0.45 0.35 0.36 0.33 0.37 0.37 0.40 0.42 0.52 0.43 0.48 0.40 0.38 0.36 0.24 0.31 N 8 8 8 8 8 8 8 8 6 6 8 8 8 5 5 8

0.19

0.18

11

Notes: N equals the number of countries with available price observations. The full sample includes Australia, Canada, Denmark, Finland, Gennany, Italy, Japan, Norway, Sweden, the United Kingdom, and the United States. Equipment-price series for Australia and Finland are not available for the 1870 to 1950 period, and internationally comparable equipment prices are not available for Sweden and Australia in 1980. Sources: See the notes and sources of Table 2. Data for 1950-1990 are from Summers et al., Penn World Table; and OECD, National Accounts.

should be identical across countries,and every country's time series of relative prices should follow the same trend. Tables 1 and 2 show quite clearlythatthis was not the case priorto 1950. Still, the patternsin Tables 1 and 2 can be understoodby consideringthe implicationsof departures fromperfectcommodity-market and integration completetradability. First,even thoughmachinesandconsumer transgoods maybe tradable, portcosts andtariffswill causerelativemachinery pricesto divergeacross countriesaccording international to differencesin productivity Ricardian (a model) or skill endowments Heckscher-Ohlin (a Giventhattechmodel).21
21See Floud,British,pp. 68-119, for a discussionof the intemational tradeof machinetools in the latenineteenth century, see Svennilson,Growth, discussionof suchtradein the earlytwentieth and for century.

Capital-GoodsPrices and Investment

73

nology is moreadvancedin high-incomecountries,andgiven thatmachine design andproduction relativelyskill-intensiveactivities,high-income are countriesshouldexhibitlowerrelativepricesfor machinery the presence in of imperfectlyintegratedglobal commoditymarkets.Figures 2A and 2B grapheachcountry'srelative priceagainstits incomepercapitaatthebeginning of ten- to 15-yearperiods. Figure 2A finds no correlationbetween initiallevels of GDP per capitaandrelativecapital-goods prices, although if observationsare excludedso thatFigure2A'Ssampleis identicalto that in Figure2B, a relativelyweaknegativecorrelation emerges.Figure2B, on the other hand, clearly shows that at times and in places where GDP per capitawas higher,the relativeprice of machinery was substantially lower. We will discuss some potentialexplanations these findingsin the next of section, but for now, we simplynote thatthe negativecorrelation mafor chineryprices is in accordwith findingsfor the postwarperiod.22 Second, Bela Balassahas shown thatthe prices of nontraded goods and services tend to be higher in countrieswith relatively high incomes.23 Balassa's findingis relevantin the contextof this articlebecausethe capitalincludesitemsthataretraded goods aggregate (suchas machines)as well as ones that are not (such as buildings,roads, irrigation, and other forms of Whentradedandnontraded construction). capitalgoods are combinedin a single capital-goods pricemeasure,they tendto offset one another because equipment pricesarelikelyto be relativelylow in placeswherenontradeable pricesarelikely to be relativelyhigh. It is not too surprising, therefore,that betweenincomeandoverallcapital-goods Figure2A finds little correlation prices even when Figure 2B finds a strongnegative correlationbetween income andrelativeprices for machines. different ratesof sectoral-productivity will advance drivechangesin Third, of the goods those sectorsproduce.For example,in an the relativeprices is advance fastestin machines, slowestin buildeconomywhereproductivity in we wouldpredicta downward trend ing, andin-between consumer goods, in the priceof machinesrelativeto consumer goods, an upwardtrendin the and trend therelative in priceof building, an indeterminate priceof all capital a trendin relativemachingoods. Table1 suggeststhattherewas- downward WarI, although and erypricespriorto World during afterthewarpricetrends in variedconsiderably the presenceof intensemacroeconomic shocks and If with the disintegration international of markets. sectoralrates commodity differacrosscountries, thebarriers tradechange, if of productivity advance to or if the nature of the goods themselves change (for example, their then and trends very different tradability), countries epochsmay experience in the relativepriceof capitalgoods andequipment.
22Jones,"Economic Growth."
23 Balassa,"Purchasing PowerParityDoctrine."

74
5.5
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Collins and Williamson

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~I

8.5

RELATIVE PRICE OF CAPITAL GOODS AND GDP PER CAPITA Notes: Graphed figures are for the levels at the beginning of each period. Periods are the same as in the notes to Figure IA. Not all countries have data available at the beginning of every period. The OLS regression line fitted through these points has slope = 0.016 (t-statistic = 0.23). Sources: See the Appendix.

A full explanationof international differencesin relativecapital-goods pricesandtheirtrendsis beyondtheboundsof this article.We can,however, see how the conceptsin the previousparagraphs manifested the histoare in riesof theUnitedStatesandJapan. havechosenthesecase studiesfortwo We reasons.First,theireconomichistories includefairlywell-documented narrativesregarding capital-goods prices,capital accumulation, international trade, and income growth. Second, these two countriesfollowed very different growthpathsoverthe 80 yearsafter1870, andso theyrepresent vastrange a of experience.The United Statesstartedand ended the period as a world leaderin incomeper capitaandwith relativelylow equipment prices.Japan the started periodwith low incomeper capitaandhighequipment pricesbut the experienced biggestequipment-price declineandthefastest of income rate We percapitagrowth. concludethesectionwithan econometric investigation of the international in differences capital-goods prices.

United States
Differentratesof productivity advanceacrosssectorshave been central to discussionsof the trendin capital-goods prices in the United States,and

Capital-GoodsPrices and Investment


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2B FIGURE RELATIVE PRICE OF EQUIPMENT AND GDP PER CAPITA Notes: Graphed figures are for the levels at the beginning of each period. Periods are the same as in the notes to Figure IA. Not all countries have data available at the beginning of every period. The OLS regression line fitted through these points as the slope = -0.42 (t-statistic = 4.3). Sources: See the Appendix.

economic historianshave always arguedthat the rate of productivityaddurables sectorwas relativelyfast.24 example,in For vance in the producer studies of nineteenth-century capital accumulation,Jeffrey Williamson and were labor-intensive, nontradable arguedthatstructures infrastructure slow ratesof productivity growth,butthatequipment was goodsundergoing a skill-intensive, tradable fast capitalgood undergoing ratesof productivity Theseassertions to well withtheU.S. growth.25 appear matchup reasonably is evidencein Table1 wheretherelativepriceof equipment reported have to held steadyeven as the relativeprice of construction all capitalgoods and rose over the 80 yearspriorto 1950. Productivity advancein the machine sectorin the sectormightnot have outpacedthatin the consumption-goods did advancein UnitedStates,butit certainly keep up, whereasproductivity to have laggedbehind. and structures othercapitalgoods seems differencesin Economic historianshave also arguedthat international
capital-goods prices, and in machinery prices in particular,might be a reflec24Rosenberg, "Technological Change," "Capital Goods," "Direction"; and David,Technical Choice; andWilliamson, "Inequality." 25Williamson, "Watersheds" "Inequality." and

76

Collins and Williamson

tion of differencesin skill endowments.26 Wherelaborwas relativelycheap and skills relativelyexpensive,the relativepriceof machinery shouldhave been high unless, of course, international goods marketswere perfectly integrated.Conversely,where skills were cheap,the relativeprice of machines shouldhave been low. Overtime, this line of argument offers a reason to expect a fall in the relativepriceof equipment developmenttends as to raiseskill endowments. UnitedStateshas alwaysbeenrelativelywell The endowed with skilled labor,and the comparative advantagein machines suggestedby Table2 is consistentwith this perspective. Williamsonalso arguedthatpartof the declinein the U.S. relativeprice of capitalgoods betweenthe 1840s andthe 1870s was due to the Civil War tariffs,which raisedthe price of manufactured consumergoods relativeto investmentgoods. The interestsof southernagricultural exporters,who opposedtariffs,and northern who manufacturers, soughtprotection,conflicted throughout antebellum the period.Not surprisingly, with the secession andeventualdefeatof the South,the balanceof politicalpower swung in favor of the northern interestswhich, throughprotection,succeededin raisingthepriceof manufactured consumption imports.Initially, policy this was motivatedby Civil Warfinance,but it stuckafterthe war,thusmaking for a morepermanent in thepriceof investment fall goods relativeto manufacturedconsumptiongoods. Canada,anotherNew World countrywith relativelylow capital-goods prices,protectedits manufacturing sectortoo, especiallyafter1878 when Conservatives cameto powerwith an explicitly protectionist platform.27 Duringa periodwhen capitalgoods were less tradmove in able,thislate-nineteenth-century towards protection NorthAmerica loweredtherelativepriceof investment goods andfosteredindustrial-based accumulation. It may appearthat the Argentineexperiencein the 1940s and 1950s is inconsistentwith the Americantariffexperiencein the 1860s, the former to contributing higherrelativecapital-goodsprices and the latterto lower relativeprices.The key to resolvingthis apparent is inconsistency thatU.S. structures homeand capitalgoods in the 1860s were mainlynontradable mademachines,whereasArgentinecapitalgoods in the 1950s were largely while the U.S. Civil Wartariffserved importedmachines.28 Co-nsequently, to raisethe relativepriceof manufactured consumption goods by morethan thatof (thenmostlynontradable) investment goods,theprotectionist Argentineregime-which gave lowestpriority theimportof capitalgoods when to
Rosenberg, and "Anglo-American"; BritoandWilliamson, "SkilledLabor." O'Rourkeand Williamson,Globalization,for a more detaileddiscussion of the political economyof tradepolicy in the New WorldandEuropein the late nineteenth century. 28 In 1913 equipment madeup only 21 percentof manufactured exportsfromthe UnitedKingdom, to United States,France,and Germany Argentina; 1950, thatpercentage risen to 51 percent by had (Svennilson,Growth, 296). p.
27 See 26

Capital-GoodsPrices and Investment

77

allocatingscarceforeignexchange(a populistmove which securedsupport from urbanworkers)--served to raise the relative price of (then mostly tradable)investmentgoods. Thus, tariffscan have differenteffects on the relativeprice of capitalgoods in differenttimes and places. Williamson's position on the price effect of the Civil Wartariffs has been challenged recentlyby De Long and Douglas Irwin.29 Later,we will offer some new econometricevidence on the connectionbetweentariffsand capital-goods prices in the pre-1950periodto assess Williamson'shypothesis. Japan TheU.S. historiography machine on pricesstressesskill endowments and productivity advance,whereasthehistoriography Japan for stressesinternationaltradeandwartimeshortages. Oneof the outstanding characteristics of Table2 is the high relativeprice of capitalgoods in Japan,especiallyin the 1870sand 1880s andespeciallyformachinery. smallsize of the domesThe tic machine-toolindustry the time of the MeijiRestoration, its evoluat and tion thereafter, discussedat lengthby ToshiakiChokki.30 is Imported machines were crucialto the establishment Japanese of arsenalsin the 1870s, and,as Kozo Yamamura pointedout,the subsequent has processof military modernization to appears haveprovidedan important impetusto the developmentof domesticmachineproduction.3" DuringWorldWarI domesticproduction machinery of expanded rapidly to fill the growingdemandwhich could not be satisfiedby importsfrom the Britain, UnitedStates,or Germany. Tables1 and2 show thatthe relative priceof capital goodsrosesubstantially Japan in theseyears,reflecting during the increase domesticdemand in coupledwithan inelasticsupplyof machine the imports during war.Inportsbounced backafterthewar,however,andthe relative priceof capital its goodsresumed long-run Theinvasionof Manfall. churiain 1931 andthe yearsof war thatfollowedagaincut off foreignsupplies of machinery, this is reflectedin the rise of the relativeprice of and Thesetemporary shocksdrovetheexpansion evolutionof the machinery. and domesticcapital-goods and industry, in doingso, mayhavecontributed the to long-run declinein Japanese permanent capital-goods prices. This feedbackfrom the demandto the supplyside of the capital-goods market beenmostclearlyarticulated NathanRosenberg. has by Althoughhe did not discuss Japanspecifically,he arguedmore generallythat"withthe growth in the demandfor machinerythe capital-goodsindustrybecame graduallymore and more highly specialized and subdividedin order to
29
30

De Long, "Trade Policy"; and Irwin, "Tariffs." Chokki, "History." 31 Yamamura, "Success."

78

Collins and Williamson

undertake production machines,the cost of producing the of machineswas therebysharply reduced 55n32 ... Presumably, Rosenberg's view is morelikely to hold when machineryis closer to being nontradable when there are or in interruptions the flow of importsto a relativelyhigh-pricecountry.Of course, Rosenberg'sfocus was on absolutecapital-goods prices, whereas this article's focus is on what we think is more relevantfor investment, relativeprices,andit is possiblethatscale andmarketsize were even more important consumption for goods thaninvestmentgoods. In sum, the Japanese case suggeststhatcountrieswill be relianton internationaltradefor machinery equipment earlystagesof development, and in a although domesticcapital-goods industry eventually may emergeandgrow along with the domesticeconomy.By implication, countries withoutstrong domesticcapital-goods industries shouldwitness a rise in the relativeprice of (tradable) capitalgoods at timeswhenthe flow of importsis interrupted. The effect of such interruptions when nontradable capital-goods prices are takeninto accountis, however,less clear.This historicalnarrative matches the trendsin Table2 well. Japanstartedwith a very high relativeprice of but machinery, it declinedsubstantially international as costs fell, transport tradeexpanded,and a competitivedomesticmachineindustrydeveloped. TheEconometrics We explore the capital-goods in price dataeconometrically Table4 by regressingthe relativecapital-goods price (or equipment price) on the log of initialGDP per capita,the log of totalGDP,anda measureof tariffrates (tariffrevenuedivided by value of imports).33 Each observationin the regressionrepresents particular a countryat the beginningof one of the followingsixperiods:1870-1885,1885-1900,1900-1913, 1913-1929,19291939, and 1939-1950. Acrosscolumns,the samplesize changesdepending on the availabilityof tariffdata. Theregressions threekeyrelationships. highlight First,consistentwiththe rawdatagraphed Figure2B, GDPpercapitawas negativelyrelatedto the in relativepriceof capitalgoods, especiallyequipment. This findingis consistentwith ourdiscussionof unbalanced factorproductivity growthas well as withthehypothesis countries that withrelatively incomesandrelatively high abundant skills will be characterized relativelycheapcapitalgoods. The by GDP per capitavariablealso has a big economicimpact.For example,accordingto the coefficienton incomeper capitain column2, at the turnof the centurynearly60 percentof the gap betweenthe United Statesand the
Rosenberg, "Capital Goods," p. 223. results are similar if we use the log ofthe relative price measure as the dependent variable. We have chosen not to use the log here so that the results of this exercise dovetail with those in the next section where the connection between investment and relative prices is assessed.
33 The 32

Capital-GoodsPrices and Investment


TABLE 4

79

CORRELATES OF THE RELATIVE PRICE OF CAPITAL GOODS, 1870A1950

CapitalGoods (1) In GDPper capita


In total GDP Tariff

Equipment (3) -11.04 (0.88) 3.28 (1.31)


-70.80

(2) -28.58 (2.46) 9.26 (3.30)

(4) -108.95 (4.68)

(5) -138.51 (5.97) 19.93 (3.71)


-

(6) -152.60 (5.45) 27.70 (4.77)


-342.97

-16.00 (1.24)

1885-1900 1900-1913 1913-1929 1929-1939 1939-1950 Constant Observations R2

15.72 (1.01) 19.33 (1.76) 18.89 (1.40) 23.83 (1.58) 36.42 (2.17) 205.41 (2.10) 64 0.1

12.71 (0.98) 15.50 (1.54) 14.24 (1.23) 18.39 (1.44) 31.65 (2.22) 213.38 (2.67) 64 0.27

(2.04) 4.15 (0.35) 12.70 (1.47) 5.53 (0.54) 6.32 (0.52) 20.28 (1.61) 152.05 (1.83) 52 0.17

14.53 (0.47) 58.69 (1.89) 49.89 (1.66) 56.35 (1.76) 87.18 (2.61) 975.24 (5.45) 52 0.43

8.82 (0.36) 52.46 (2.10) 42.60 (1.63) 48.25 (1.65) 80.71 (2.68) 1004.27 (6.43) 52 0.57

(4.65) -9.37 (0.50) 31.51 (1.40) 22.82 (0.98) 33.21 (1.34) 76.98 (2.94) 1092.72 (6.11) 46 0.59

Deviation(in parentheses) Statistics: Meanand Standard Summary Relativeprice In GDPper capita


In total GDP Tariff

96.96 (29.08) 7.97 (0.51)

96.96 (29.08) 7.97 (0.51) 10.36 (1.54)

95.94 (19.98) 8.09 (0.45) 10.48 (1.53)


0.13

152.46 (67.26) 7.96 (0.50)


-

152.46 (67.26) 7.96 (0.50) 10.64 (1.52)


-

141.17 (56.03) 8.04 (0.45) 10.57 (1.59)


0.12

(0.08)

(0.07)

Notes: The dependent variableis the relativepriceof capitalgoods or equipment the beginningof at the relevant to period.GDP per capita,totalGDP, andthe tariffratealso pertain the beginningof the period. The omittedcategoryfor the time indicatorvariablesis 1870 to 1885. For the regressions, robuststandard errors used to calculatethe t-statistics are in reported parentheses. Sources:See Table2 andthe Appendixforthe relativepricesources.InitialGDP percapitaandtotal GDP are fromMaddison,Monitoring.The tariffdataare those underlyingCollins, O'Rourke,and Williamson,"WereTradeand FactorMobility."

averagerelativecapital-goods priceforthe restof ourOECDsamplecanbe accountedfor by the relativelyhigh level of GDP per capitain the United States34 Alternatively, accordingto the coefficient on income per capitain column 5, about74 percentof the tur-of-the-centurygap between Japan andthe averagerelativepriceof equipment therestof ourOECDsample for can be accountedfor by Japan'srelativelylow level of GDP per capita.
/ (Yus.- YAVG.), /3is the coefficientestimate we calculate[(3x)(Xus. - XAVG.)] where 3 Specifically, on ln GDPpercapitain Table4, Xis ln GDPpercapita,and Yis therelative priceof capitalgoods. The is average(AVG.) calculatedfor the non-UnitedStatesaround1900.

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Collins and Williamson

Second, columns2 and 5 show thatfor a given level of GDP per capita, the overallsize of the domesticeconomyis positivelycorrelated with relative capital-goodsprices, a finding contrary our expectationsbased on to Rosenberg'swork. Third,highertariffsare associatedwith lower relative capital-goods prices, a findingwhich supports Williamson'sinterpretation of the connectionbetweentariffsand capital-goods prices in the pre-1950 period.35 coefficientin column3 impliesthatapproximately percent The 39 of the turn-of-the-century betweenthe averagerelativeprice of capital gap goods in the UnitedStatesandthatin the in the rest of the samplecountries canbe accounted by therelativelyhighU.S. tariff.36 for Similarly, coeffithe cientin column6 impliesthatnearly65 percentof the U.S. advantage the in relativeprice of equipmentis accountedfor by the relativelyhigh tariff. Thus, to the extentthattariffsdistorted pricespriorto 1950 in this sample, they apparently so in a way thatfavoredcapitalgoods relativeto condid sumergoods, a findingthatmighthelp explainthe positive correlation between growthandtariffsuncoveredby Paul Bairochand Kevin O'Rourke for the late nineteenthcentury,a correlation which is negative for the late twentiethcentury.37
CAPITAL-GOODS PRICESAND INVESTMENTBEHAVIOR

As noted in the introduction, relativeprice of capitalgoods has been the featuredprominentlyin a numberof recent cross-sectionstudies of lateeconomicgrowth.Jones,for example,uses dataunderlytwentieth-century ing the PWT to arguethat"an increasein the relativeprice of machinery reducescapitalaccumulation thereforereducesthe growthrate of the and economy."38 have capital-goodsprices always had this influence on But investmentandgrowth,or is it only a late-twentieth-century phenomenon? Is the influencestrongenoughthatit belongsnearcenterstageas we search for an explanationof the historicalpatternsof capital accumulation that currentdifferencesin GDP per capita? underpin Following Jones and Diego Restucciaand CarlosUrrutia,we offer an empiricalassessmentof the link between capital-goods prices and invest" Fortheequipment pricedata,thecoefficienton thetariffvariable remains negativeandstatistically significanteven when the UnitedStates(a high tariff,low PKIPC country)is omittedfromthe regression. Fortheall capitalgoodspricedata,thecoefficientbecomespositivebutstatistically insignificant when the UnitedStatesis omitted. 3 Note this figureis not directlycomparable thefigurereported the previousparagraph to in regarding the influenceof GDPpercapita.Both the sampleandthe specification changewhenmovingfrom column2 to column3. 37Bairoch and "European"; O'Rourke, "Tariffs." 38Jones, "EconomicGrowth," 372. p.

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ment rates in Table 5.39 We use the investment rates ratherthan the change in capital stock (a truer measure of capital accumulation) because capital stock estimates are not as widely available as investment estimates. For the moment, we treat the capital-goods price as an exogenous variable. Each observation in the regression represents a particular country's experience over one of the six periods defined earlier.40 The investment share in GDP is regressed on the log of GDP per capita, the relative price of capital goods (or machinery) at the beginning of each period, and the real interest rate on long-term financial assets at the beginning of each period.4" also include We time-period indicators in case period-specific circumstances affected both investment rates and capital-goods prices simultaneously, although the coefficients and statistical significance of the price variables are similar if we do not. Across columns, the sample size changes depending on the availability of price and interest-rate data. We find that the correlation between investment rates and capital-goods or equipment prices is in all cases negative and statistically significant, even after controlling for differences in levels of GDP per capita. According to Table 5, column 1, a one-standard-deviation increase in the relative price of capital goods is associated with a decline in the investment share of about 3.6 percentage points (an elasticity of - 0.68). According to column 2, a onestandard-deviation increase in the relative price of equipment is associated with a decline in the (total) investment share of 3.4 percentage points (an elasticity of - 0.46). For the sake of perspective, if the United States had had a relative price of capital goods equal to the average of other countries in 1870 (not including Japan),the regression suggests that the U.S. investment share would have been about 2.4 percentage points lower than it actually was-between 1870 and 1885. Previous studies of international income convergence have found that the U.S. growth rate outpaced the predictions of long-run convergence regressions.42In other words, the United States was a high-income country, which continued to grow quickly relative to the
39Restuccia and Urrutia, "Public Policy." The constant price investment and GDP series from each country are used to form a series representing the constant price investment share over time, and then internationally comparable figures for investment and GDP from the PWT for 1950 are used to benchmark each country's constant price investment share in that year. On the basis of standard growth theory, Restuccia and Urrutia argue that internationally comparable prices should be used when comparing investment shares across countries. For the sake of comparison, earlier versions of this paper included estimates using current price investment rates, and qualitatively similar results emerged. 40 Formostcountries wehaveyear-to-yearmeasures forgrowth, investment and capital goods prices, but we have chosen not to use that year-to-year variation in a time-series analysis because in many cases the national accounts (at some level) must interpolate between benchmark dates to create these series and therefore the year-to-year variation may not be informative. We believe that the historical national accounts are most useful for comparisons over longer periods of time. 41 The real interest rate figures are derived from unpublished data supplied by Michael Bordo and Alan Taylor. Of course, cross-country comparisons of such rates are necessarily inexact. 42Wright, "Origins"; and Williamson, "Globalization."

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TABLE 5 INVESTMENT SHARES AND CAPITAL GOODS PRICES, 1870-1950 (1) (2) (3) -0.001844 (3.59) -0.0005184 (3.20) -0.02384 (0.73)
-

(4)

(5) -0.001802 (3.50)

(6)

Capital-goods -0.001233
price (6.03)

Equipment
price In GDP per capita Real interest rate 1885-1900 0.005147 (0.30)

1900-1913
1913-1929 1929-1939 1939-1950 Constant Observations
R2

0.02192 (0.92) 0.03312 (1.43) 0.01549 (0.66) 0.003668 (0.14) 0.03948 (1.27) 0.2373 (1.79) 63 0.36

0.01199 (0.42) 0.04463 (1.43) 0.01676 (0.55) 0.003372 (0.10) 0.04272 (0.95) 0.4194 (1.59) 51 0.23

0.008906 (0.33) -0.1646 (0.59) 0.02703 (0.77) 0.04637 (1.33) 0.01204 (0.34) 0.005974 (0.13) 0.01957 (0.39) 0.2707 (1.21) 43 0.33

-0.0005361 (2.27) -0.03812 (0.83) -0.1232 (0.30) 0.02209 (0.49) 0.05548 (1.11) 0.03060 (0.61) 0.02644 (0.40) 0.03590 (0.53) 0.5316 (1.48) 37 0.17

0.009494 (0.36)

-0.0005272 (2.32) -0.03695 (0.83)

0.02504 (0.76) 0.04293 (1.32) 0.01410 (0.43) -0.003933 (0.11) 0.02832 (0.64) 0.2555 (1.16) 43 0.32

0.02101 (0.51) 0.05301 (1.17) 0.03041 (0.64) 0.01962 (0.36) 0.04352 (0.69) 0.5162 (1.48) 37 0.16

Summary Statistics: Mean and Standard Deviation (in parentheses) Investment 0.1773 rate (0.0615) Capital-goods 97.26 price (29.22) In GDPper 7.96 capita (0.52) Interest rate 0.1703 (0.0657) 153.05 (67.79) 7.95 (0.50) 0.1774 (0.0658) 96.05 (20.91) 8.10 (0.45) 0.0471 (0.0512) 0.1736 (0.0693) 140.62 (56.13) 8.04 (0.46) 0.0460 (0.0497) 0.1774 (0.0658) 96.05 (20.91) 8.10 (0.45) 0.1736 (0.0693) 140.62 (56.13) 8.04 (0.46)

Notes: The dependent variable is the average gross investment share in GDP over the period valued at constant prices. The omitted category for the time period indicators is 1870 to 1885. The constant price investment series are calculated by taking the ratio of each country's constant price investment and GDP series, and then benchmarking this series to that implied by the Penn World Table in 1950. For the regressions, t-statistics are in parentheses based on robust standard errors. Columns 5 and 6 are specified like columns 1 and 2 respectively, but they exclude the observations missing from columns 3 anId4 for the sake of comparison. Sources: See the Appendix.

rest of the world despite the implicationsof neoclassical growthmodels. Table 5 identifies one part of the explanation:the United States was favored by low relative capital-goodsprices throughoutthe period under consideration. Consideranothercase: Europe's golden era of growthover the quarter centuryafter 1950. This was an era of spectacular catch-upon the United and it apparently States, took place in spite of relativelyexpensive capital

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goods and machinery.43 Table2 shows thatin 1950, as Europewas poised to launchits greatAmericancatch-up,the relativeprice of machineswas substantially higher therethan in the United States.These countries(and Japan) successfullyconverged U.S. incomelevels despitetheirdisadvanon tageousprice structure, they hadto pay for it with highersavingsrates. but Columns3 and 4 addthe real interestrateat each period'sbeginningto the regressions. This changesthe samplecompositionconsiderably because interest-rate dataare not availablefor every country. The real-interest-rate variableis negativelyrelatedto the investment rate,butthe coefficientestimateis veryimprecise.Thisimprecision mightbe dueto demand-side forces thattendto raiseinvestment interest and ratessimultaneously to problems or withtheinternational comparability ofthe interest rates,orboth.Also, while using the interest rate at the period's beginning might help avoid the demand-driven discussedpreviously, factthatrealinterestratescan bias the changeratherquicklymightmakethe beginning-of-period interestratean unreliable proxyforthe full period'sfinancialcost of capital.The specifications of columns5 and 6 are similarto those of columns 1 and 2, but their samples are trimmedto match those of columns 3 and 4 for the sake of comparison.The coefficient estimateson the price variablesare similar acrossthe columns. Becausethe relativepriceof capitalgoods is not exogenouslydetermined andmightbe measured with error, kind of estimation this procedure might not offera cleanidentification the effectof capital-goods of priceson investment. For example, forces which shift the demandcurve for investment goods to the rightwill simultaneously raise the price of capitalgoods and of quantity investment and undertaken, thiswill tendto generate (spurious) a positive relationship between investmentrates and relative capital-goods prices.Wemitigatethisbias in two ways:first,theperiod-specific dummies should help control for any demand-driven positive bias associatedwith booms andbusts;second,by relyingon pricesprevailing globalinvestment at the beginningof the period,ratherthanan averageover the period, we mute demand-driven run-upsin the price within each countryover any period. Furthermore, includingGDP per capita in the regressionshould mitigateanybias associatedwith the relationship betweenlevel of development, capital-goods prices, and investment rates.44Finally, including fixed effectsin addition theperiodeffectsdoes not elimicountry-specific to nate the negative correlation between the price of capital goods and the investmentshareof GDP (resultsnot shown). In otherwords,this appears to be a fairlyrobustempiricallink.
4 See Crafts andToniolo,EconomicGrowth, Europe'spostwargrowth. on 44 It turnsout thatomitting the GDPpercapitavariablefromthe regressions reported Table5 has in

little effecton the coefficientestimates capital-goods for prices.

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Going one step further,however, we borrow from the regressions speci-

fied in Table4 (whererelativecapital-goods pricesarethe dependent variable) to constructtwo-stage least squaresestimatesof the connectionbetweencapital-goods pricesandinvestment. Thisapproach, whichthe first in stage is similarto thatrunin Table4 andthe second stageis similarto that in columns1 and2 of Table5, shouldhelpcircumvent potentialsources two of bias:the endogeneity havealready we discussed,as well as measurement errorin thepricevariables. the Essentially, totalGDPandthetariffvariables serveas instruments thecapital-goods for pricevariable. two-stageleast The squareestimateforthe effectof the relativepriceof capitalgoods on investment is - 0.003317 (t-statisticequals3.01) andfor the effect of the relative price of machineryis -0.0005371 (t-statisticequals 1.87). Both estimates are at least as strong(in magnitude)as those obtainedfrom ordinaryleast squares,thoughthe standard errorsare somewhatlarger.45
CONCLUSIONSAND ADDITIONALQUESTIONS

Thisarticledevelopsa dataset thatdocuments relativepriceof capital the goods in 11 countriesfrom 1870 and 1950. Althoughit mustbe viewed as
only a start on a long-term assessment, some stylized facts seem to be ro-

bust. First, differentcountriesexperienceddifferenttrendsin the relative priceof capitalgoods. Some,suchas Japan, a underwent spectacular decline in the aggregatecapital-goods price from 1870 to 1914, while others,such as thosein Scandinavia, underwent rise.However,andsecond,therelative a priceof equipment everywhere to 1914, an event in accordance fell up with the view thatproductivity growthwas relativelyfast in the producer-goods sector. Third, there was substantialvariance in the level of the relative capital-goods prices acrosscountries.Some, such as Japanand Italy,were disadvantaged relativelyexpensivecapitalgoods,andthusneededhigher by savingsratesto achievethe same accumulation ratesas theircompetitors. Others,such as Canadaand the United States,were favoredby relatively cheap capital goods, and thus, comparedwith their competitors, could achieve the same accumulationperformancewith lower savings rates. Fourth,the dispersionof relativepricesnarrowed over time. considerably With these new data in hand, the remainder the article pursuestwo of questions.First, how can we explain international differencesin capitalgoods price levels andtrends?We arguethatdifferencesin relativeprices acrosscountries havepersisted even during periodsof globalization because many capitalgoods are nontradable, even for the tradable and goods, both
45The tariffmeasure not availablefor the full sample,so the ordinary is leastsquaresestimatesthat arerelevantfor the sake of comparison not those in Table5. Rather, are using the same sampleas in thetwo-stage the least regressions, ordinary squares coefficients wouldbe: - 0.001869 forcapital-goods pricesand -0.0005195 for machinery prices.

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85

natural politicalbarriers tradehave alwaysexisted.Givenbarriers and to to tradeandnontradable goods, international price differencesarisenaturally frominternational differencesin productivity skill endowments. and These hypothesesare consistentwith the strongnegativecorrelation find bewe tweenincomepercapitaandequipment prices.Drawing economichistorion ans' qualitativeknowledge of U.S. sectoralproductivitytrends,we also arguethatdifferential ratesofproductivity advanceacrosssectorscangenerate the observedtrendsin relativepricesof equipment, buildings,andoverall capitalgoods. Second,we ask whetherthe relativeprice of capitalgoods had a significant impact on investment.Evidently,the answer is yes: at times and in placeswherecapitalgoodswererelatively expensive,investmnent were rates relativelylow. Thisfindingconfirms theconnection that betweeninvestment rates and investment-goods prices identifiedby Jones and Restucciaand Urrutia the post-1960periodexistedin thepre-1950periodas well. The for impactof capital-goods prices is statistically significantand economically powerful.Moreover, negativecorrelation fairlyrobustfromaneconothis is metricstandpoint. We conclude with some speculationsabout the evolution of a global capitalmarket.We have shown thatcapitalgoods marketswere farbetter integrated the 1980s thanthey were in the 1880s, at least if one accepts in price dispersionas a measureof integration.In contrast,many observers have arguedthatfinancialcapitalmarkets were as well integrated century a ago as now. Thus, the time pathof the capital-goodsprice dispersionhas been quite differentfromthatof financialvariables.Presumably, care we aboutcapital-market becauseit canhave an impacton accumuintegration lation performanceand the global distributionof the capital stock. The results of this article suggest that studies of international capital-market must take accountof morethanjust the financialside of those integration marketsbecause in both theoryandhistorythe prices of the capitalgoods themselves play an importantrole in determininginvestmentrates and growthperformance.

Appendix:Capital-GoodsPrice and Investment Data, 1870-1950


Thisappendix the discusses assembly thecapital-goods indices,andit docuof price mentsthe sources thepriceandinvestment of seriesforeachcountry oursample. in In order movebetween to nominal realfigures investment, and for national accountants must haveaninvestment-goods series.However, is rather foractual it price rare capital-goods pricesto be usedin the construction the priceindices,especially of historical national accounts. is muchmorecommon the pricesto be estimated thebasisof input It for on for prices, example simply by combining engineering wageswithsteelpricesformachin-

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indices,andso on wagesandmaterial costs forbuilding-construction ery,orby combining of The for othersubcomponents investment. "allcapitalgoods"priceindexthen amounts subcomponents. to a combination the indices for all the underlying of improvements the in The most glaringproblemwith such a methodis thatproductivity especially in the equipmentprice capital-goodssector are almost surely mnismeasured, as series. Unfortunately, CharlesFeinsteinnotes .. . the exceptionallyheterogeneous industrymakesit extremelydifficultto of natureof most of the output- the engineering obtaincontinuous price series."46 the Whatare the implicationsof such issues for this study?First,regarding trendof capitalgoods prices:in this articlewe arealwayslookingat relativeprices,andit is likely allowanceforproductivity indicesalso sufferfrominadequate thatthe consumption-price seriesupward more gainsbiastheequipment productivity gains.Nonetheless,ifthe omitted series,then the relativeprice of equipment severelythanthey do the consumption-price priceofbuilding accounts series.Therelative wouldfall morein realitythaninthe national advanceis relativelyslow), on the otherhand,probablywould rise (whereproductivity biasesin the equipmorein realitythanin the national-accounts series.Thus,the potential mentandbuildingserieswouldtendto workagainstone another the "allcapitalgoods" in series, but the degree(or direction)of bias could changeover time as the relativeimporof tance of the varioussubcomponents capitalgoods changes.These are exceptionally and thereis not much difficultissues facinghistoricalnationalaccountants, unfortunately we can do in this articleto resolvethem, thoughthe problemsoughtto be kept in mind when interpreting series. the even if we supposethatthe 1950benchcross-country comparisons: Second,regarding will the marksareappropriate, biasesdiscussedin thepreviousparagraph probably operate to differentextentsin differentcountries.The estimationmethodsdiffersomewhatfrom data input-price probablydifferfromplace to place to place, the natureof the underlying in of kindsof investment theoverallpriceseries place,andtherelativeimportance different thereis a fairlylargemarginof error differfromplaceto placeas well. Consequently, must in the cross-country comparisons, especiallyas we travelfartherfrom the benchmarks. nationalaccountsseriesfor each countryon a consistentbasis Again, shortof re-creating raw (whichis impossiblegiventhe available data),thereis notmuchwe can do to improve the estimatedseries. Whenthose priceestimatesare used in the investenettregressions, the to however,thereis somethingwe can do to attempt circumvent problemsassociated variablesapproach our and with measurement error, this motivated use of an instrumental to estimation. error if the regressions: thereis measurement in thepriceseries,then Regarding investment error thereis measurement in theinvestnentserieswhicharebasedon thosepriceestimtes. rateson capital-goods a of priceswill tendto be biased. Consequently,regression investment variable an for such econometric method circumventing biasis through instrumental A standard in We to approach estimation. providesuchan estimate the text,andwe get resultsthatare standard errors. withsomewhat to similar thosefroman OLSregression, though larger cites the nationalaccountssourcesforthe serieswe have of Theremainder the appendix used in this article. AUSTRALIA PriceIndexfor CapitalGoods: DomesticProduct, p. 33. 1870-1939: N. Butlin,Australian The AnnualDatabase." series is for privatenon1939-1950: M. Butlin,"Preliminary
46Feinstein, "National Statistics," 263. p.

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dwellinginvestment. PriceIndicesfor Machinery Equipment Building: and and Not available. PriceIndexfor Consumption Goods: 1870-1950: Mitchell,International HistoricalStatistics:Africa.We use a consumerpriceindexbecausewe havenot foundone forthe consumption-goods component of GDP. Current Price Valueof Investmnent: 1870-1939: N. Butlin,Australian DomesticProduct,pp. 6-7. 1940-1950: Mitchell,International HistoricalStatistics:Africa,pp. 1017-18. Current PriceValueof GDP: 1870-1939: N. Butlin,Australian DomesticProduct,pp. 6-7. 1940-1950: Mitchell,International HistoricalStatistics:Africa,pp. 1017-18. Constant PriceValueof Investment: 1870-1939, 1949-1950: Mitchell, InternationalHistorical Statistics: Africa, pp. 1017-18. 1939-1949: M. Butlin "Preliminary AnnualDatabase." Constant Price of GDP: 1870-1939 1949-1950: Mitchell, InternationalHistorical Statistics: Africa, pp. 1017-18. 1939-1949: M. Butlin (1977). CANADA PriceIndexfor CapitalGoods: 1870-1929: Datafor roughlyeveryten yearsarefromFirestone,"Canada's Economic Development,"p. 178. Missing data(except 1916-1919 which are left blank) are interpolated. 1929-1950: Urquhart, HistoricalStatisticsof Canada,p. 305. PriceIndexfor Machinery Equipment: and 1870-1929: DerivedfromFirestone,"Canada's EconomicDevelopment," 10001. pp. The 1880figureis calculated draftof the aforementioned using anunpublished paper by Firestone.Missingdata(except 1916-1919) areinterpolated. 1929-1950: Leacy,HistoricalStatisticsof Canada,seriesK160-171. PriceIndexfor Building: 1870-1929:DerivedfromconstructionindexinFirestone, "Canada's Economic Development,"pp. 100-01). The 1880 figureis calculated draftof the using an unpublished aforementioned paperby Firestone. 1929-1950: Leacy,HistoricalStatisticsof Canada,series K160-171. PriceIndexfor Consumption Goods: 1870-1929: Firestone,"Canada's EconomicDevelopment," 178). Missing data(exp. cept 1916-1919) areinterpolated. 1929-1950: Urquhart, HistoricalStatisticsof Canada, p. 305. PriceValueof Investnent: Current 1870-1900: Investment sharesare fromKuznets("Quantitative Aspects"),who based figureson Firestone EconomicDevelopment") 1870, 1890,and 1900. ("Canada's for Missing dataareinterpolated. 1901-1930: Leacy,HistoricalStatisticsof Canada, series F179-182. Leacy provides sums.Investnentsharesarecalculated five yearperiodsby dividing for quinquennial by the quinquenniial of GNP. sum

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1930-1950: Mitchell,International HistoricalStatistics:TheAmericas, pp. 750, 754. Current PriceValueof GNP: 1901-1930: Derived fromAltman,"RevisedReal Canadian GNP Estimates." 1930-1950: Mitchell,International HistoricalStatistics:TheAmericas, pp. 750, 754. ConstantPrice Valueof Investment: 1870-1929: Firestone,"Canada's EconomicDevelopment," 275. We use the series p. for gross investmentin new residentialand nonresidentialconstructionand new machineryand equipment. 1929-1950: Mitchell,International HistoricalStatistics:TheAmericas,pp. 750, 754. ConstantPrice Valueof GNP: 1870-1929: Firestone,"Canada's EconomicDevelopment," 275). p. 1929-1950: Mitchell,International HistoricalStatistics:TheAmericas,pp. 750, 754. DENMARK Price Index for CapitalGoods: 1870-1950: Derived from currentand constantprice investment series in Hansen, 0konimiskvekst. Price Index for MachineryandEquipment: 1870-1950: DerivedfromBjerke,"National Product." Price Index for Building: 1870-1950: DerivedfromBjerke," NationalProduct." Price Index for Consumption Goods: 1870-1950: Derived fromHansen,0konimiskvcekst. Current ConstantPrice Valueof Investment: and 1870-1950: Mitchell,International HistoricalStatistics:Europe,pp. 890, 893, 899. Current ConstantPriceValueof GDP: and 1870-1950: Mitchell,International HistoricalStatistics:Europe,pp. 890, 893, 899. FINLAND Price Index for CapitalGoods: 1870-1950: Derived from currentand constant price investmentseries in Hjerppe, FinnishEconomy,pp. 201-04, 211-13. Price Indicesfor MachineryandEquipment Building: and Not available. Price Index for Consumption Goods: 1870-1950: DerivedfromHjerppe, FinnishEconomy,pp. 201-04,211-13. We use the series for privateconsumption. Current ConstantPrice Valueof Investment: and 1870-1950: Hjerppe,FinnishEconomy,pp. 201-04, 211-13). Current ConstantPriceValueof GDP: and 1870-1950: Hjerppe,FinnishEconomy,pp. 201-04, 211-13). GERMANY Price Index for CapitalGoods: 1870-1950: Hoffmann, Das Wachstum, 598-600. pp.

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Price Index for MachineryandEquipment: 1870-1950: Index for agricultural machineryfrom Hoffmann, Das Wachstum, pp. 569-70. Price Index for Building: 1870-1950: Hoffmann,Das Wachstum, 569-70. pp. Price Index for Consumption Goods: 1870-1950: Hoffinann,Das Wachstum, 598-600. pp. Current ConstantPrice Valueof Investment: and 1870-1950: Series for net investmentfromHoffmann, Das Wachstum, 825-28. pp. Current ConstantPrice Valueof GDP: and 1870-1950: Seriesfornetnationalproduct fromHoffmann, Das Wachstum, 825-28. pp. ITALY Price Index for CapitalGoods: 1870-1950: Ercolani,"Documentazione statistica," 434-35. pp. Price Indexfor MachineryandEquipment: 1870-1950: Vitali, "Lastima,"pp. 511-12. Price Index for Building: 1870-1950: Vitali, "Lastima,"pp. 499-502. Price Index for Consumption Goods: 1870-1950: Ercolani,"Documentazione statistica," 434-35. pp. Current ConstantPrice Valueof Investment: and 1870-1950: Mitchell,International HistoricalStatistics:Europe,pp. 891, 895, 901. Current ConstantPrice Valueof GDP: and 1870-1950: Mitchell,International Historical Statistics:Europe,pp. 891, 895, 901. JAPAN Price Index for CapitalGoods: 1870-1940: Ohkawaet al., Estimates,volume 8, p. 134. 1952: Ohkawaet al., Patterns,p. 389. Price Indexfor Machineryand Equipment: 1870-1950: Ohkawaet al., Estimates,volume 8, p. 161-62. Price Indexfor Building: 1870-1940: Ohkawaet al., Estimates,volume 8, p. 158-59. 1952: We formeda link using capitalgoods price index. Price Indexfor Consumption Goods: 1870-1940: Ohkawaet al., Estimates,volume 6, p. 106. 1952: Ohkawaet al., Patterns,p. 389. Current ConstantPrice Valueof Investment: and 1870-1950: Mitchell,International HistoricalStatistics,Africa,pp. 1002-08. Current ConstantPrice Valueof GDP: and 1870-1950: Mitchell,International Historical Statistics,Africa,pp. 1002-08. NORWAY Price Indexfor CapitalGoods: 1870-1930: Bjerke,Langtidslinger Norsk 0konomi, pp. 142, 148-51. I

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1930-1950: Aukrust,Nasjonalregnskap, 316-17. pp. Price Index for MachineryandEquipment: 1870-1930: Bjerke,Langtidslinger NorskOkonomi, 142, 148-51. I pp. 1930-1950: Aukrust,Nasjonalregnskap, 318-19. pp. Price Index for Building: 1870-1930: Bjerke,Langtidslinger Norsk 0konomi, pp. 142, 148-51. I 1930-1948: Aukrust,Nasjonalregnskap, 318-19. We linked to 1950 using the pp. capital-goodsprice index. Price Index for Consumption Goods: 1870-1900: Private consumptiongoods prices from Bjerke, LangtidslingerI Norsk Okonomi,p. 142. 1900-1930: Cost of living seriesunderlyingWilliamson,"Globalization." 1930-1950: Private consumptiongoods prices from Aukrust,Nasjonalregnskap, pp. 316-17. and Current ConstantPrice Valueof Investment: 1870-1950: Mitchell,International HistoricalStatistics:Europe,pp. 891, 896, 902. and Current ConstantPriceValueof GDP: 1870-1950: Mitchell,International HistoricalStatistics:Europe,pp. 891, 896, 902. SWEDEN Price Index for CapitalGoods: 1870-1950: DerivedfromJohansson,GrossDomesticProduct,pp. 134-37. Price Index for MachineryandEquipment: 1870-1950: DerivedfromJohansson,GrossDomesticProduct,pp. 134-37. Price Index for Building: 1870-1950: Derived fromJohansson,GrossDomesticProduct,pp. 134-37. Price Index for Consumption Goods: 1870-1950: DerivedfromJohansson,GrossDomesticProduct,pp. 122-29. Current ConstantPriceValueof Investment: and 1870-1950: Johansson,GrossDomesticProduct,pp. 134-37. and Current ConstantPrice Valueof GDP: 1870-1950: Johansson,GrossDomesticProduct,pp. 150-53. UNITED KINGDOM Price Index for CapitalGoods: 1870-1920: Feinstein,"NationalStatistics," 470-71. pp. 1920-1950: Feinstein,NationalIncome,table 61. Price Index for MachineryandEquipment: 1870-1920: Feinstein,"NationalStatistics," 470-71. pp. 1920-1950: Feinstein,NationalIncome,table 63). Price Index for Building: 1870-1920: Feinstein,"NationalStatistics," 470-71. pp. 1920-1950: Feinstein,NationalIncome,table 63). Price Index for Consumption Goods: 1870-1950: Feinstein,NationalIncome,table 61). and Current ConstantPrice Valueof Investment: Historical Statistics:Europe,pp. 891, 897, 905. 1870-1950: Mitchell,International and Current ConstantPrice Valueof GDP: Historical Statistics:Europe,pp. 891, 897, 905. 1870-1950: Mitchell,International

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Price Index for CapitalGoods: 1870-1950: Derived fromKuznets,Capital,pp. 572-74. All datahere are reportedas five-yearmoving averages. Price Index for Machineryand Equipment: 1870-1950: Derived from gross producers'durablesfigures in Kuznets, Capital, pp. 596-97. Price Index for Building: 1870-1950: Derivedfromnonfarm residential figuresin Kuznets,Capital,pp. 576-79. PriceIndex for Consumption Goods: 1870-1950: Derived fromKuznets,Capital,pp. 561-64. Current ConstantPrice Valueof Inv stment: and 1870-1950: Kuznets, Capital,p. 572. Current ConstantPriceValueof GD)': and 1870-1950: Kuznets, Capital,p. 561. REFI RENCES Altman,Morris."RevisedRealCanadian NPEstimates CanadianEconomic G and Growth, 1870-1926." Reviewof Incomeand J4ealth no. 4 (1992): 455-73. 38, Auerbach,Alan J., Kevin A. Hassett,and L ;tevenD. Oliner."Reassessingthe Social Retums to Equipment Investment." Quarerly Journalof Economics 109, no. 3 (1994): 789-802. Aukrust,Odd.Nasjonalregnskap 1930-193 ) og 1946-1951. Oslo: StatistiskSentralbyra, 1952. Bairoch,Paul."European Trade Policy, 1815-1914."In TheCambridge EconomicHistory of Europe 8, edited by P. Mathiasand S. Pollard, 1-160. Cambridge:Cambridge UniversityPress, 1989. Balassa,Bela. "ThePurchasing PowerParityDoctrine:A Reappraisal." JournalofPolitical Economy72, no. 6 (1964): 584-96. Barro,RobertJ., andXavierSala-i-Martin. EconomicGrowth. New York:McGraw-Hill, 1995. Bjerke, Juul.Langtidslinjer Norsk 0konomi 1865-1960. Oslo: StatistiskSentralbyra, I 1966. Bjerke, Kjeld. "TheNational Productof Denmark,1870-1952." Income and Wealth5 (1955): 123-51. Brito, DagobertL., and JeffreyG Williamson."SkilledLaborand NineteenthCentury Anglo-American Managerial Behavior." Explorationsin EconomicHistory 10, no. 3 (1973): 235-52. Butlin, M. W. "A Preliminary AnnualDatabase1900/01 to 1973/74."Mimeo, 1977. Butlin, N. G. AustralianDomestic Product, Investmentand Foreign Borrowing 18611938/39. Cambridge: Cambridge UniversityPress, 1962. Chokki,Toshiaki."A Historyof the MachineTool Industry Japan." Machineryand in In EconomicDevelopment,edited by MartinFransman,124-52. London:Macmillan Press, 1986. Collins, WilliamJ., Kevin O'Rourke,andJeffreyG.Williamson."Were TradeandFactor in MobilitySubstitutes History?" Migration:TheControversies theEvidence, In and editedby RiccardoFaini, Jaimede Melo, andKlausF. Zimmermann, 22740. Cambridge:Cambridge UniversityPress, 1999.

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