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Explaining price level differences: New evidence on the Balassa–Samuelson effect
Author(s) -
Chen LeinLein,
Choi Seungmook,
Devereux John
Publication year - 2015
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/0038-4038-2012.235
Subject(s) - economics , relative price , price level , econometrics , monetary economics
We re‐examine one of the most venerable results in economics, the Balassa–Samuelson effect of Balassa (1964) and Samuelson (1964). The central claim of Balassa–Samuelson is that nontradables explain price level differences across rich and poor economies. We test Balassa‐Samuelson by quantifying the contribution of nontradables to cross‐sectional price level variation for countries in the International Comparison Program (ICP). Our results suggest that nontradables explain up to two thirds of price level variation.