Balassa-Samuelson effect

The Balassa-Samuelson effect is either of two related things:

Footnotes

1 There may be a causal link from exchange rates to productivity, as well as (or instead of) the opposite direction of causation (from productivity to RERs) given by the BS-hypothesis model. Michael E. Porter's The Competitive Advantage of Nations says that currency depreciations can reduce growth, and that 'overvalued' currencies can contribute to domestic productivity growth by 'forcing' efficiency improvements in the tradables sector (by exposing it to international competition at unfavourable terms of trade). In fact, Singapore gave "Competitive Appreciation" as the official reason for the high SGD policy. (Lu & Yu 1999). Other mechanisms through which RERs can effect productivity growth have been advanced, such as the idea that structural transitions caused by exchange rate volatility have a disruptive effect on the real economy. There is some econometric evidence that the causality from exchange rates to productivity is more significant than the reverse, i.e. the BS-effect. (For instance, Strauss, J. 1999. Productivity Differentials, the Relative Price of Nontradables and Real Exchange Rates. in the Journal of International Money and Finance number 18.)

Related Topics:
¹ - Michael E. Porter - Singapore - SGD - 1999 - Causality - Journal of International Money and Finance

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

2 The BS-hypothesis would still explain the Cape Verde price index rise in its own terms if the incomes from rising emigrant's remittances were counted as local traded-goods 'productivity' increases. In their study of Cape Verde, Bourdet & Falck found that the export sector strengthened during the 1990s period of currency appreciation, which might support the theory of "Competitive Appreciation" mentioned in the footnote above.

Related Topics:
² - Emigrant - Cape Verde - 1990s

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

3 A typical reason for, and result of, trade barriers, is that domestic productivity of some tradable-good is below international productivity. In order to protect domestic producers import barriers are raised, allowing the local price for the traded good to rise beyond the international price. If this were a common phenomenon then one of the key assumptions of the BS-hypothesis (that traded-goods follow the PPP-hypothesis) would be invalid. However, the essence of the Balassa-Samuelson mechanism would still remain: Even without Free trade it may be harder to increase the productivity in the service sector as rapidly as in mass-production, so if money exchange rates are still based on the output of mass production the differentials in price level could still be caused by the Balassa-Samuelson effect.

Related Topics:
³ - Trade barriers - Protect - PPP - Free trade

~ ~ ~ ~ ~ ~ ~ ~ ~ ~