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Can Firms’ Location Decisions Counteract the Balassa-Samuelson Effect?

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  • Isabelle Méjean

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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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2006-12.

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Date of creation: Jul 2006
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Handle: RePEc:cii:cepidt:2006-12

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Keywords: PPP; International trade; Relocation;

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References

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  8. 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.
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Cited by:
  1. Olivier CARDI & Romain RESTOUT, 2013. "Imperfect Mobility of Labor across Sectors: a Reappraisal of the Balassa-Samuelson Effect," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2013002, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  2. Masashige Hamano, 2011. "The Harrod-Balassa-Samuelson effect and endogenous extensive margins," CREA Discussion Paper Series 11-21, Center for Research in Economic Analysis, University of Luxembourg.
  3. Lopcu, Kenan & Dülger, Fikret & Burgaç, Almıla, 2013. "Relative productivity increases and the appreciation of the Turkish lira," Economic Modelling, Elsevier, vol. 35(C), pages 614-621.

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