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The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited

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  • Fadi Hassan
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    Abstract

    It is conventional wisdom that richer countries have a higher price level than poorer countries. This paper provides evidence that the price-income relationship is non-linear and that it turns negative, or at best flat, in low income countries. The result is robust along both cross-section and time-series dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result.

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    File URL: http://cep.lse.ac.uk/pubs/download/dp1056.pdf
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    Bibliographic Info

    Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1056.

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    Date of creation: Jun 2011
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    Handle: RePEc:cep:cepdps:dp1056

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    Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

    Related research

    Keywords: Balassa-Samuelson; Penn effect; developing countries; non-parametricestimation; purchasing power parity; real exchange rate;

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    1. Angus Deaton & Alan Heston, 2009. "Understanding PPPs and PPP-based national accounts," Working Papers 1186, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    2. Berthold Herrendorf & Akos Valentinyi, 2006. "Which Sectors Make the Poor Countries so Unproductive?," 2006 Meeting Papers 304, Society for Economic Dynamics.
    3. Bergin, Paul R & Glick, Reuven & Taylor, Alan M, 2004. "Productivity, Tradability and the Long-Run Price Puzzle," CEPR Discussion Papers 4494, C.E.P.R. Discussion Papers.
    4. D.S. Prasada Rao, 2004. "The Country-Product-Dummy Method: A Stochastic Approach to the Computation of Purchasing Power Parities in the ICP," CEPA Working Papers Series WP032004, School of Economics, University of Queensland, Australia.
    5. Diego Restuccia & Dennis Tao Yang & Xiaodong Zhu, 2007. "Agriculture and Aggregate Productivity: A Quantitative Cross-Country Analysis," Working Papers e07-3, Virginia Polytechnic Institute and State University, Department of Economics.
    6. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
    7. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
    8. Martin Ravallion, 2010. "Understanding PPPs and PPP-Based National Accounts: Comment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 46-52, October.
    9. Angus Deaton, 2010. "Price indexes, inequality, and the measurement of world poverty," Working Papers 1207, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
    10. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
    11. Erwin Diewert, 2010. "Understanding PPPs and PPP-Based National Accounts: Comment," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 36-45, October.
    12. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
    13. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 327-68, May.
    14. Douglas Gollin & Stephen L. Parente & Richard Rogerson, 2004. "The Food Problem and the Evolution of International Income Levels," Working Papers 899, Economic Growth Center, Yale University.
    15. Diewert, Erwin, 2008. "New Methodology for Linking the Regions," Economics working papers erwin_diewert-2008-9, Vancouver School of Economics, revised 09 Sep 2008.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Is it cheaper to live in poor economies?
      by Economic Logician in Economic Logic on 2011-07-20 14:01:00

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