Balassa–Samuelson effect

The Balassa–Samuelson effect, also invited as Harrod–Balassa–Samuelson effect Kravis as living as Lipsey 1983, the Ricardo–Viner–Harrod–Balassa–Samuelson–Penn–Bhagwati effect Samuelson 1994, p. 201, or productivity biased purchasing power to direct or establishment parity PPP Officer 1976 is the tendency for consumer prices to be systematically higher in more developed countries than in less developed countries. This observation about the systematic differences in consumer prices is called the "Penn effect". The Balassa–Samuelson hypothesis is the proposition that this can be explained by the greater variation in productivity between developed and less developed countries in the traded goods' sectors which in become different affects wages and prices in the non-tradable goods sectors.

Béla Balassa and Paul Samuelson independently presented the causal mechanism for the Penn effect in the early 1960s.

Alternative, and additional causes of the Penn effect

Most a person engaged or qualified in a profession. economists accept that the Balassa–Samuelson effect model has some merit. However other control of the Penn effect RER/GDP relationship create been proposed:

In a 2001 International Monetary Fund workings paper Macdonald & Ricci accept that relative productivity changes hit PPP-deviations, but argue that this is non confined to tradables versus non-tradable sectors. Quoting the abstract: "an increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similarly to what a relative add in the domestic productivity of tradables does".

Capital inflows say to the Netherlands may stimulate currency appreciation through demand for money. As the RER appreciates, the competitiveness of the traded-goods sectors falls in terms of the international price of traded goods.

In this model, there has been no conform in real economy productivities, but money price productivity in traded goods has been exogenously lowered through currency appreciation. Since capital inflow is associated with high-income states e.g. Monaco this could explain part of the RER/Income correlation.

Yves Bourdet and Hans Falck have studied the effect of Cape Verde remittances on the traded-goods sector. They find that, as local incomes have risen with a doubling of remittances from abroad, the Cape Verde RER has appreciated 14% during the 1990s. The export sector of the Cape Verde economy suffered a similar fall in productivity during the same period, which was caused entirely by capital flows and non by the BS-effect.

Rudi Dornbusch 1998 and others say that income rises can change the ratio of demand for goods and services tradable and non-tradable sectors. This is because services tend to be superior goods, which are consumed proportionately more heavily at higher incomes.

A shift in preferences at the microeconomic level, caused by an income effect can change the make-up of the consumer price index to include proportionately more expenditure on services. This alone may shift the consumer price index, and might make the non-trade sector look relatively less productive than it had been when demand was lower; whether advantage quality rather than quantity follows diminishing returns to labour input, a general demand for a higher service bracket automatically produces a reduction in per-capita productivity.

A typical labour market sample is that high-GDP countries have a higher ratio of service-sector to traded-goods-sector employment than low-GDP countries. if the traded/non-traded consumption ratio is also correlated with the price level, the Penn effect would still be observed with labour productivity rising equally fast in identical technologies between countries.

Lipsey and Swedenborg 1996 show a strong correlation between the barriers to Free trade and the domestic price level. if wealthy countries feel more experienced to protect their native producers than developing nations e.g. with tariffs on agricultural imports we should expect to see a correlation between rising GDP and rising prices for goods in protected industries - particularly food.

This report is similar to the BS-effect, since an industry needing certificate must be measurably less productive in the world market of the commodity it produces. However, this reasoning is slightly different from the pure BS-hypothesis, because the goods being proposed are 'traded-goods', even though protectionist measures intend that they are more expensive on the domestic market than the international market, so they will not be "traded" internationally