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The Balassa‐Samuelson Model: A General‐Equilibrium Appraisal *
Author(s) -
Asea Patrick K.,
Mendoza Enrique G.
Publication year - 1994
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/j.1467-9396.1994.tb00043.x
Subject(s) - economics , productivity , general equilibrium theory , econometrics , relative price , hodrick–prescott filter , computable general equilibrium , macroeconomics , business cycle
We derive two key propositions of the Balassa‐Samuelson model as long‐run balanced growth implications of a neoclassical general equilibrium model. the propositions are that productivity differentials determine international differences in nontradable relative prices and deviations from PPP reflect differences in nontradable prices. Closed‐form solutions are obtained and tested using panel methods applied to long‐run components of OECD sectoral data computed using the Hodrick‐Prescott filter. the results indicate that labor productivity differentials help explain international low‐frequency differences in relative prices. However, predicted nontradable relative prices are less successful in explaining long‐run deviations from PPP. Unless very sophisticated indeed, PPP is a misleadingly pretentious doctrine, promising us what is rare in economics, detailed numerical predictions. (Paul A. Samuelson, 1964, p. 153)