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Can firms' location decisions counteract the Balassa-Samuelson effect?

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Méjean, Isabelle

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Abstract

This paper examines the determinants of relative prices in a model combining a Harrod-Balassa-Samuelson (HBS) mechanism and an endogenous location of traded good producers. Besides the standard HBS effect, asymmetric productivity improvements in the traded good sector push new firms to enter the market. This benefits local consumers who save on trade costs and exerts an upward pressure on relative wages. As a consequence, relative prices in the traded good sector either increase or fall in general equilibrium. In a panel cointegration framework, the wage effect is shown to dominate. This means the HBS effect is strengthened by the relocation of traded good producers.

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Publisher Info
Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 76 (2008)
Issue (Month): 2 (December)
Pages: 139-154
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Handle: RePEc:eee:inecon:v:76:y:2008:i:2:p:139-154

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Web page: http://www.elsevier.com/locate/inca/505552

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Related research
Keywords: Long-run real exchange rate Balassa-Samuelson effect New Trade theory Panel cointegration;

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  10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  11. Behrens, Kristian & Lamorgese, Andrea & Ottaviano, Gianmarco Ireo Paolo & Tabuchi, Takatoshi, 2004. "Testing the Home Market Effect in a Multi-Country World: The Theory," CEPR Discussion Papers 4468, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. MacDonald, Ronald & Ricci, Luca Antonio, 2007. "Real exchange rates, imperfect substitutability, and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 639-664, December. [Downloadable!] (restricted)
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