Balassa-Samuelson effect

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

The future of the 'Balassa-Samuelson effect'

If productivity growth is declining then it may limit the size of the Balassa-Samuelson effect, as a halving of productivity growth in both tradable and non-tradable sectors would halve the relative productivity growth as well.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

If the Balassa-Samuelson (BS) hypothesis is largely responsible for the deviation from purchasing power parity it is asked why the effect's principal assumption is true; why are productivity gains faster in tradable than non-tradable sectors? It is generally assumed that the production of tradables can be automated more completely than non-tradables. (Compare car and car-washes.) In economic jargon this is expressed as: tradables manufacture is more capital intensive. However, the degree to which tradables business is capital intensive may be declining; the knowledge economy has seen the rise of tradable services, such as financial products, with headcount as the principal business expense (implying a low marginal product of capital). If the productivity difference is dependent on capital accumulation, the size of the Penn effect may decline with the economic significance of heavy machinery.

Related Topics:
Purchasing power parity - Automated - Jargon - Capital intensive - Knowledge economy - Marginal product - Penn effect

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

However, the market in traded goods must always be more competitive than in non-tradables, simply because it is global. In the tradable marketplace all producers of a commodity are in competition with all the other producers of the same item (and similar substitutes). Non tradables must only out-compete the local rivals. If competition drives productivity growth, tradables will always have higher growth than non-tradables, and (if the hypothesis is true) the Penn effect will always be with us.

Related Topics:
Traded goods - Global - Competition - And

~ ~ ~ ~ ~ ~ ~ ~ ~ ~