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Why are nontraded goods cheaper in poor countries?

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  • Choi, Yoonho
  • Jin, Hailong
  • Choi, E. Kwan

Abstract

Balassa and Samuelson argued that production technologies differ among countries, and the price of the nontraded good is higher in countries with higher labor productivity. This paper shows that the Balassa-Samuelson effect exists even when countries share identical production technologies. In the celebrated Heckscher-Ohlin model, changes in factor endowments do not affect the equalized factor prices. This paper considers a three-factor, three-industry model, and demonstrates that endowment differences between countries can cause disparities in their wage rates and the prices of the nontraded good. A dynamic panel data analysis shows that a 10% increase in per capita real GDP results in a 2% increase in the housing price for non-EU OECD countries.

Suggested Citation

  • Choi, Yoonho & Jin, Hailong & Choi, E. Kwan, 2018. "Why are nontraded goods cheaper in poor countries?," ISU General Staff Papers 201803280700001651, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:201803280700001651
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