One bias comes from temporary exchange rate fluctuation. Balassa samuelson model 5 holding other things constant, as pn increases, the labor demand of the nontradable sector increases and the amount of labor used in the nontradable sector will increase. Balassa and samuelson also examined the effect that deviations of exchange rates from ppp have on intercountry income comparisons. Chowdhury, khorshed, modelling the balassa samuelson effect in australia, australasian accounting, business and finance journal modelling the balassa samuelson efec t in australia khorshed chowdhury 0 2 recommended citation 0 university of wollongong 1 school of economics university of wollongong 2 jel classification. Two alternative names were also in use during the seventies. These findings provide direct evidence on the channels central to the theories of the dutch disease and the balassa samuelson effect.
The simplest model which generates a balassa samuelson effect has two countries, two goods one tradable, and a country specific nontradable and one factor of production, labor. The main result is that an increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an. Balassa provided empirical evidence that the real price structure of a large group of countries shows a systematic correlation with the level of percapita income. Samuelsona w polsce i innych krajach europy srodkowowschodniejharrod balassa samuelson effect in poland and other countries of central and eastern europe. Why south africa is cheap for the rich and expensivefor the poor. The balassasamuelson effect has major implications for interpretation of the inflation and the exchange rate criteria for european monetary.
A b s t r a c t the penn balassa samuelson effect is the stylized fact about the positive correlation between crosscountry price level and percapita income. The oft invoked balassa samuelson effect, whereby the movements of prices for nontradable goods relative to those for tradable goods reflect the movements of relative labour productivities, is customarily derived from a standard neoclassical model with highly restrictive features. As a result, the supply of nontradalbe will increase. Disclaimer the views expressed in this paper are those of the authors and do not necessarily represent those of the swiss national bank. The larger the productivity growth rate difference between the tradable and nontradable sectors, the faster the real exchange rate appreciation in an economy.
Bela balassa, hungarian economist 19281991 who gave his name to the balassasamuelson effect. Balint balassa, hungarian poet 15541594 balint balassi memorial sword award, hungarian literary award. However, when dividing the period into two subperiods, it can be found that balassa samuelson effect became more significant in the later part of the transition period. Heterogenous job separations and the balassasamuelson. The balassa samuelson effect from the 1970s to the 1990s. The problem that i would like to discuss is as follows for more details, please read the supplement to handout no. Countries with high productivity growth also experience high wage growth, which leads to higher real exchange rates. Clarifying the adjusted big mac index in 2011, the economist introduced adjusted big mac estimates of currency value, which. This paper introduces a special issue marking the thirtieth anniversary of the publication of two classic papers in international economics, balassa 1964 and samuelson 1964. Frbsf economic letter 201711 april 17, 2017 2 establish their european headquarters in london and take advantage of these agglomeration effects, while relying on free mobility of labor to attract the necessary talent from all over the eu.
Pdf this paper examines whether electoral motives and government ideology influence shortterm economic performance. The domestic test involves testing whether an increase in the differential between new zealand tradable to nontradable productivity growth has tended to be associated with. This paper discusses the harrod balassa samuelson hbs effect in mexico during the period 19702009. This guidance note outlines the construction and contents of rprod. Estimating the impact of the balassasamuelson effect on inflation and the real exchange rate during. Eurozone competitiveness in a dynamic balassa samuelson penn framework kevin stahler, peterson institute for international economics arvind subramanian, ministry of finance, government of india. The balassasamuelson hypothesis in developed countries and. In particular, the bs hypothesis explains the two effects. This section includes detailed lecture material used in this course. Given the crosssectional dependence and structural breaks, we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and nonstationary factors. The model emphasizes the role of markup variations as an important aspect driving relative price movements.
The survey encompasses the published empirical work on the phenomenon since its rediscovery in 1964. Tina zumer abstract as in other transitional economies the real exchange rate appreciation has been observed in slovenia over the transition period. The paper surveys empirical evidence on the harrod balassa samuelson effect. Sometimes the penn effect is called the balassa samuelson effect balassa, 1964. A small open economy with the balassa samuelson effect, cergeei working papers wp547, the center for economic research and graduate education economics institute, prague. The stolper samuelson theorem the stolper samuelson theorem is one of the central results of heckscherohlin theory q. The balassasamuelson connection in a developing economy, one which is catching up with the income levels in the more economically advanced countries, productivity in the sectors producing tradeable goods will tend to rise faster than in those producing nontradeables. Balassasamuelson effect bela balassa and paul samuelson 1964 lower price of goods in the non traded sector in developing countries is mainly due to lower labour productivity in the traded goods sector compared to developed countries. Our estimates of the bs term suggest that the balassa samuelson effect in these 4 cee countries does not have to be as sizeable as other studies propose. Samuelson, 1964, which is the most prominent theoretical explanation for the penn effect.
Bela balassa the effects method of project evaluation also including marc chervel, the rationale of the effects method. We find that equilibrium real exchange rates in these countries are predominantly driven by positive. New evidence from oecd countries matthias gubler and christoph sax. The paper finds clear evidence of the balassasamuelson effect in both its international and domestic versions in all six countries.
The balassasamuelson effect in china and its implications. The balassasamuelson effect and the channels of its. Bela balassa the effects method of project evaluation. A small open economy with the balassasamuelson effect. Balassa 1964 and samuelson 1964 known as the balassa samuelson hypothesis which states that the productivity differences in tradables and nontradables sectors across countries lead to differentiation of wages, price levels and, hence the real exchange rates. In view of hong kongs high longterm output growth, the balassa samuelson effect may have contributed much.
Assume that the technological level of nontradable sector are the same across countries. Rprod delivers the following indicators computed for each country included in the database, and relative to its main trading partners. The note tests for both domestic and international balassa samuelson effects. Mar 04, 2018 using two mediumterm g10 fx drivers a gauge of the balassasamuelson effect and the terms of trade we run a fixedeffect panel regression on the g10 currencies, using the us dollar and the euro as the base currencies. Assessment of the balassasamuelson effect in croatia core.
We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Longrun coefficients are estimated using a panel dynamic ols estimator. This paper presents new evidence on this issue based on a panel data sample of 16 developing countries. The paper finds that the tradednontraded productivity differential is a significant determinant of the relative price of nontraded goods. There are many factors influencing real exchange rate movements in the economies undergoing structural changes in the short and. Institute of international economics warsaw school of economics abstract the fundamental goal of this paper is to examine the strength of the balassasamuelson effect. Introduction for most countries there has been a tendency for increases in the prices of nontraded goods to exceed increases in the prices of traded goods e. The balassasamuelson effect, also known as harrodbalassasamuelson effect kravis and lipsey 1983, the ricardovinerharrodbalassasamuelsonpennbhagwati effect samuelson 1994, p. We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates.
Without reservation, we would like to thank sylvia. This paper estimates the balassasamuelson effects for 11 countries in central and eastern europe on a disaggregated set of quarterly data covering the period from the mid1990s to the first quarter of 2008. A giant discovery with the value of 10% of a countrys gdp. Pdf the pennbalassasamuelson effect vy ly academia. Rprod includes five measures of this effect based on. This paper aims at examining the balassasamuelson bs hypothesis in 20 developed and 20 developing countries, respectively. The balassasamuelson effect suggests that an increase in wages in the tradable goods sector of an emerging economy will also lead to higher wages in.
When we compare gdp or per capita income across countries, the use of actual exchange rates as conversion factors often yield biases. Analytical notes on the balassasamuelson effect podkaminer. Pdf the balassasamuelson effect in romania researchgate. Shortrun exchange rate behaviour is modelled using a general model of nonlinear adjustment.
The balassasamuelson model in general equilibrium with. The paper finds clear evidence of the balassa samuelson effect in both its. Goods that can be easily shipped sell for roughly the same price everywherethere are differences due to taxes and transportation costs and such things, of. In so doing, we use an econometric model that incorporates structural changes. This new database developed by cepii complements the eqchange database, by providing additional measures of the balassa samuelson effect.
This paper investigates the impact of the distribution sector on the real exchange rate, controlling for the balassasamuelson effect, as well as other macro variables. It provides a definite answer to a central question in applied economics. Real exchange rate, balassasamuelson hypothesis, panel data estimation. A starting point for the derivation of the balassasamuelson model is an assumption of an economy consisting of two sectors the tradable t and the non. Reconsidering the balassa samuelson e ect vincent zdadam,y marek xhanusch, nicola viegi the authors would like to thank sebastien dessus, ha nguyen, and max rudibert steinbach for valuable. The literature argues that nontradables are more expensive in richer countries due to balassa samuelson bs effects and attributes the higher prices of tradable retail goods to local cost components such as distribution costs, rents, and wages burstein et. An application of the specic factor model hisahiro naito. The balassa samuelson effect depends on intercountry differences in the relative productivity of the tradable and nontradable sectors. Development of the american economy, international finance and macroeconomics.
Harrod balassa samuelson effect, real exchange rate, central and. Chowdhury, khorshed, modelling the balassasamuelson effect in australia, australasian accounting, business and finance journal modelling the balassa samuelson efec t in australia khorshed chowdhury 0 2 recommended citation 0 university of wollongong 1 school of economics university of wollongong 2 jel classification. Ppp holds for tradable goods results in little support of bs hypothesis. This contribution embeds the balassasamuelson hypothesis in a general equilibrium model that combines monopolistic competition and markup variations to examine the determinants of relative prices of nontradables. The balassasamuelson effect is why i always get a haircut when visiting a developing country. Balassa samuelson effect the supplyside economists and others have argued that raising international competitiveness through policies that promote traded goods sectors productivity at the expense of other sectors will increase a nations gdpand increase its standard of livingwhen compared with treating the sectors equally. There is little empirical research on whether balassa samuelson effects can explain the longrun behavior of real exchange rates in developing countries. Modelling the balassasamuelson effect in australia pdf.
The balassasamuelson effect in the new eu member states and its impact on their competitiveness in intraeu trade pawel folfas m. Balassasamuelson and wage, price and unemployment dynamics in the spanish transition to emu membership. There is little empirical research on whether balassa samuelson effects can explain the. The body of empirical evidence is synthesized through four major elements. Pdf a spatial explanation for the balassasamuelson effect. In total, 58 empirical papers are examined within a specialized analytical framework. Harrodbalassasamuelson effect in selected countries of.
The balassa samuelson model explains this phenomenon through the differential. The balassasamuelson hypothesis in the developed and. Historical data for over hundred years and 14 countries is used to estimate the longrun effect of productivity on the real exchange rate. Estimation of the balassasamuelson effect in slovenia. If the purchasing power parity holds, the real exchange rate is always equal to one. The balassasamuelson bs effect implies that highly productive countries have higher inflation and appreciating real exchange rates because of larger. If an internal link intending to refer to a specific person led you to this page, you may wish to change that link by adding the persons given name s to the link.
Economic transformation and real exchange rates in the 2000s. The balassasamuelson bs hypothesisstated by both balassa 1964 and samuelson 1964, with a research precedent in the work of harrod 1933is one of the most widespread explanations for structural deviations from purchasing power parity ppp. W e argue, however, that this relationship is also in. Since sectorspecific data for oecd countries on total factor productivity tfp have become available through the release of the discontinued international sectoral database isdb by the oecd, various studies have tested the bs hypothesis in panel data for the years after bretton woods.
A spatial explanation for the balassasamuelson effect. Use the free adobe acrobat reader to view this pdf file there is little empirical research on whether balassasamuelson effects can explain the longrun behavior of real exchange rates in developing countries. Why south africa is cheap for the rich and expensive for. Balassasamuelson and wage, price and unemployment dynamics. This paper investigates the impact of the distribution sector on the real exchange rate, controlling for the balassa samuelson effect, as well as other macro variables. Papell and ruxandra prodan university of houston november 2003 we use longhorizon real exchange rate data for 16 industrialized countries to investigate. Variations in the markup makes fiscal policy nonneutral and. Purchasing power parity and the balassasamuelson effect. Some fear that the balassa samuelson bs effect might be a major obstacle for the central and eastern european countries ceec to become members of the economic and monetary union emu. C22, f11, f31 modelling the balassa samuelson efec t in australia.
A reply to bela balassa and bela balassa, effects method of project evaluation once again reprinted froni oxford biulletitn of econiomlics and statistics 38 november 1976 and 39 november 1977. Pdf this paper aims to provide estimates of the the balassasamuelson effect in romania the extent to which differences in productivity growth. Tutorial 3 balassa samuelson effect ruhruniversity. Earlier studies that estimated the balassasamuelson effect to be larger have often neglected to consider the impact of productivity differentials on inflation relative. The balassasamuelson effect in china and its implications for chinas equilibrium real exchange rate yu chen abstract with a rapid accumulation of current account surpluses and foreign exchange reserves in china in the. This paper provides evidence that the priceincome relation is actually nonlinear and turns. Heterogenous job separations and the balassa samuelson effect noel gaston university of south australia taiyo yoshimi chuo university abstract we incorporate different sectoral job separation rates into a twosector small open economy model to investigate the balassa samuelson bs effect.
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