Question

According to the Balassa-Samuelson effect, price levels are related to productivity in the tradables sector.

a. Explain the intuition behind the Balassa-Samuelson effect.

b. What does the Balassa-Samuelson effect imply for differences in price levels between rich and poor countries?

c. What does the Balassa-Samuelson effect imply for differences in inflation between rich and poor countries?

Please provide an answer for A, B and C.

Answer 1

A. The Balassa-Samuelson effect points out that high growth in commodity production leads to high wage rates, which in turn increases the purchasing power of consumers. This further leads to price increases, which in turn leads to higher inflation. Surprisingly, compared with developed countries, developing countries show higher inflation rates because developing countries are more inclined to increase productivity, which leads to higher wage rates and inflation rates.

B. Convenient countries belong to the category of developing countries. These countries focus more on production that leads to productivity growth; increased production leads to higher wage rates and further price increases; on the other hand, rich countries are in a state of poverty. The category of developed countries and their relative growth is not much, so it will not cause further price increases like developing countries.

C. It can be clearly seen from point B that according to the Balassa-Samuelson effect, compared with rich and developed countries, poor countries are more likely to have high wage rates; compared with developed and developed countries, high housing prices in poor countries lead to higher wage rates. The inflation rate. country.