Balassa- Samuelson model Flashcards
assumptions of balassa-sam model
• 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
• Assumption: equal wages between traded and non
traded sectors within each economy
• Wages: positively related to labour productivity
• Prices: determined positively by wages and inversely
by productivity (both, labour and capital, although
only labour productivity is consideded)
does PPP hold in the traded sector?
Yes so SPt*=pt
PPP work for non-traded goods?
No so SPN* >PN
and π*>π
low wages in developing countries are due to..
…low productivity in the traded goods sector
• This leads to a relatively low price for nontraded goods even if productivity in the nontraded sector is equal for developed and developing countries.
• High productivity in rich countries’ tradable sector leads to high wages in its non- tradable
sector.