Thread by @RobertInklaar

Is Europe falling behind the US on productivity? The Krugman vs Aghion–Bergeaud–Garicano debate hinges on one choice: current vs constant PPPs. A new note maps the gap behind it — all 27 EU states, two data sources — and what it does and doesn't settle. 🧵

At current PPPs (each year's own price comparison) the EU–US gap barely widens. At constant PPPs (a fixed base year) it widens sharply. They diverge because EU prices fell vs the US by more than the inflation differential implies. That divergence is a puzzle.

What the note shows. 1) The gap is general: it appears for every EU member state, in both PWT and Eurostat/BEA national accounts. 2) It's not specific to GDP, it shows up just as strongly for consumption, so it isn't about export vs consumption price dynamics.

3) Disaggregating by COICOP category, the gap splits: PPPs fall faster than prices for tradeables (comms, recreation, transport) but rise relative to prices for hard-to-measure services (health, education). These effects partly offset

Why does the gap exist? Not composition, not weighting: a fixed-basket index on domestic price changes just reproduces the deflator (@a_bergeaud's point). What's left is product sampling & quality adjustment, i.e., which specific products enter each comparison.

But "sampling" is a residual. For tradeables it likely means deflators miss real convergence (PPP right). For services, that PPP can't match like with like (deflators right). The aggregate alone can't say which dominates.

Where I land. The data fix the growth differential, not the level. "Europe fell from parity to ~80% of the US" is the 1995 cross-section carried forward by growth. Re-anchor on 2024 and run growth backward, and Europe ends up above the US in 1995.

Both are equally valid constant-PPP constructions, differing by the same gap. So it's the fixed base year that needs defending, not current PPP. The defensible read: Europe grew more slowly; whether there is a gap in levels is not pinned down precisely

One fact that should discipline the mechanisms: the gap is large vs the US (and Japan) but small among large European economies. So it's US/Japan-specific, not "European." A generic technology or sampling story would predict intra-EU divergence too. We don't see it.

That is a puzzle worth resolving, but until it is resolved, accepting a sizable degree of uncertainty around any year's relative level estimate is the defensible position.

Net: Krugman and Aghion–Bergeaud–Garicano and I agree on much: faster US growth, current vs constant PPPs answer different questions, weighting isn't the driver. The disagreement is a reliability prior (which measure to trust).

Full technical note here: . Comments welcome. cc @paulkrugman @Ph_Aghion @a_bergeaud @lugaricano @MESandbu @SethAckermangithub.com/rcinklaar/PPPn…