International differences in national price levels and prices of individual products are striking and have persisted over long periods, despite the presumed equalizing influence of international trade and despite the liberalization of trade and reduction of transport costs that have occurred. For example, prices in Japan in the 1980s and 1990s were 40 percent higher, on average, than for the OECD countries as a group. In the Nordic countries and Switzerland, prices were 15 to 25 percent higher. In the United States, by contrast, prices were 10 percent lower, and in Portugal 20 percent lower than the OECD average.
Individual product prices often differ even more sharply from one country to another. In 1999, for example, prices for Office Machines and Equipment in Austria were twice as high as in the United States, and they were almost twice as high in France. Prices for Domestic and Other Household Services in Norway were 3 to 4 times as high as in the United States and 3 times as high as in Ireland.
Most explanations of the causes of national price differences focus on factors that affect the prices of less tradable products, especially services, since price differences tend to be eroded in the more tradable sectors of the economy. However, most empirical studies have analyzed differences in national price levels rather than in prices of individual products. In an earlier paper (Lipsey and Swedenborg, 1999), the present authors examined the determinants of product prices across countries, distinguishing between goods prices and service prices.
We found that country characteristics such as per capita income and wage compression, specifically relatively high wages of the least skilled, raised the price of services somewhat more than the price of goods. But the difference was rather small. We concluded that the dichotomy between goods and services was an oversimplification, partly because all goods prices had a nontradable component in the form of domestic transportation and distribution costs. We also suggested, but did not test, that the effect of per capita income and wage compression would vary depending on the labor intensity of the final product.
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Product Price Differences Across Countries: Determinants and Effects
