If the productivity growth differential between the traded and nontraded goods sectors is larger in the accession countries than the euro area, the relative price of. Balassasamuelson, relative productivity, tradables, nontradables. This paper aims to provide estimates of the the balassasamuelson effect in romania the extent to which differences in productivity growth between tradables and nontradables industries explain. We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The balassasamuelson effect states that productivity differences between the production of tradable goods in different countries 1 explain large observed differences in wages and in the price of services and between purchasing power parity and currency exchange rates, and 2 it means that the currencies.
This paper provides evidence that the priceincome relation is actually nonlinear and turns. The balassa samuelson 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. This guidance note outlines the construction and contents of rprod. The balassasamuelson effect, also known as harrodbalassasamuelson effect kravis and lipsey 1983, the ricardovinerharrodbalassasamuelsonpennbhagwati effect samuelson 1994, p. The competitiveness in the light of the balassasamuelson.
This paper sets out to examine the economic effects of exchange rate changes in developing countries by the use of alternative definitions of the real exchange rate. The recessionary effect on productivity is captured by the break date of 1985. This working paper should not be reported as representing the views of the imf. 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 domestic test involves testing whether an increase in the differential between new zealand tradable to nontradable productivity growth has tended to be associated with. The body of empirical evidence is synthesized through four major elements. Harrodbalassasamuelson effect in selected countries of. 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. This paper presents new evidence on this issue based on a panel data sample of 16 developing countries. This section includes detailed lecture material used in this course.
Equal wages between traded and non traded sectors within each economy. A giant discovery with the value of 10% of a countrys gdp. These findings provide direct evidence on the channels central to the theories of the dutch disease and the balassa samuelson effect. 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. The balassasamuelson effect is why i always get a haircut when visiting a developing country. Introduction the computable general equilibrium cge framework allows to simulate the balassa samuelson bs effect, by imposing productivity shocks at individual sector level. This paper studies the balassasamuelson effect in 9 ceecs.
Harrod balassa samuelson effect, real exchange rate, central and. Unlike previous studies which estimated higher values for this effect, this paper considers the productivity differential of each sector and the weight of the tradables. Empirical findings the variables considered in this study are a mix of i 0 lnrt and i 1. Samuelson is professor of economics and institute professor emeritus. Production of tradables and nontradables requires inputs of capital kt, kn and labor lt, ln. We therefore provide a solution to the purchasing power parity puzzle.
Tutorial 3 balassa samuelson effect ruhruniversity. The larger the productivity growth rate difference between the tradable and nontradable sectors, the faster the real exchange rate appreciation in an economy. The balassa samuelson effect why are prices higher in rich countries. In view of hong kongs high longterm output growth, the balassa samuelson effect may have contributed much. The note tests for both domestic and international balassa samuelson effects.
This new database developed by cepii complements the eqchange database, by providing additional measures of the balassa samuelson effect. Also, i have split the original page in half, the empirical text is on penn effect now. The evidence presented in the paper shows that devaluation generally improves the balance. There are many factors influencing real exchange rate movements in the economies undergoing structural changes in the short and. The series for germany was retropolated with the previous west. 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. Evidence was found of a significant longrun relationship between real exchange rate and australiaus productivity differential during the period of 19502003. Development of the american economy, international finance and macroeconomics. Tina zumer abstract as in other transitional economies the real exchange rate appreciation has been observed in slovenia over the transition period. Balassa samuelson effect harrod balassa samuelson effect 2. The balassa samuelson effect and economic competitiveness in this paper we analyze the effects of the balassa samuelson effect and how it leads to erosion and violation of competitive ability of a country, starting from the economic conditions, which exist in developing countries like.
The balassa samuelson effect and economic competitiveness in this paper we analyze the effects of the balassa samuelson effect and how it leads to erosion and violation of competitive ability of a country, starting from the economic conditions, which exist in developing countries like in bosnia and herzegovina. Moreover, the estimated halflife is about two years with large shocks. The balassasamuelson effect arises when productivity growth of the tradable sector exceeds that in the non tradable sector. Rprod delivers the following indicators computed for each country included in the database, and relative to its main trading partners. Samuelsona w polsce i innych krajach europy srodkowowschodniejharrod balassa samuelson effect in poland and other countries of central and eastern europe. The balassa samuelson effect depends on intercountry differences in the relative productivity of the tradable and nontradable sectors. An application of the specic factor model hisahiro naito. As a result, the supply of nontradalbe will increase. Perspectivesvolume 18, number 3summer 2004pages 5146. Use the free adobe acrobat reader to view this pdf file. 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. The paper surveys empirical evidence on the harrod balassasamuelson effect. The survey encompasses the published empirical work on the phenomenon since its rediscovery in 1964. Pdf the pennbalassasamuelson effect vy ly academia.
Balassasamuelson effect, dsge, european monetary union, exchange rate regimes, maastricht convergence criteria. A survey of empirical evidence pdf, efzg working paper series 0607. A test of the balassasamuelson effect applied to chinese. The baseline balassasamuelson model implies that a differential productivity growth fully translates into inflation differentials between a catchingup and an. This paper studies the balassa samuelson effects in two areas with strong differences in economic development, sixteen oecd countries and sixteen latin american economies. 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 balassa samuelson model explains this phenomenon through the differential.
Effects of exchange rate changes in developing countries. Effects of exchange rate changes in developing countries english abstract. The balassasamuelson effect and the channels of its. 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. Modelling the balassasamuelson effect in australia pdf. Real exchange rate, balassasamuelson hypothesis, panel data. An overview 5 the economy is assumed to be at full employment. 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. Dont worry i dont plan to use famine as an example, just allude to it after the example. This paper examines the balassa samuelson hypothesis in australia using the ardl cointegration framework. The balassasamuelson effect, also known as harrodbalassasamuelson effect kravis and. Pdf a spatial explanation for the balassasamuelson effect. Modelling the balassasamuelson effect in australia by. Balassa samuelson 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.
The results indicate that a one per cent increase in labour productivity in australia relative to the us will lead to 5. 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. Applying recent panel cointegration and bootstrapping techniques that solve for crosssectional dependence and small panel size problems, we find some evidence for not rejecting. Using panel cointegration techniques, we find strong empirical evidence in favour of what we call the internal transmission mechanism since productivity growth in the open sector is found to bring about nontradable inflation. What links here related changes upload file special pages permanent link. Estimation of the balassasamuelson effect in slovenia.
There is little empirical research on whether balassasamuelson effects can explain the. W e argue, however, that this relationship is also in. Sources of deviations from purchasing power parity ppp barriers to. The balassasamuelson effect in china and its implications. The balassasamuelson hypothesis in developed countries. The views expressed in this working paper are those of the authors and do not necessarily represent those of the imf or imf policy.
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