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Towards an Explanation of National Price Levels

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  • Irving B. Kravis
  • Robert E. Lipsey

Abstract

The purpose of this paper is to call attention to the need for a theory of comparative national price levels and to explore some of the elements that seem to belong to such a theory. Most theoretical discussions have maintained that national price levels tend towards equality and focus on presumably temporary divergences from equality. Yet strong evidence has been accumulating that there are large and long-standing differences inprice levels, the highest of which are more than twice those of countries with the lowest prices. Long-run price level differences are most clearly related to levels of real per capita output, with richer countries having higher price levels.These differences have been explained as resulting from greater advantages in productivity for the wealthier countries in goods production, mostly tradable, than in services production, mostly nontradable. The differences in relative productivity may be in total factor productivity or only in labor productivity, reflecting the greater capital intensity of goods production and possibly a higher elasticity of substitution between capital and labor in goods production.We find in the empirical analysis that a large part of the differences in price levels can be explained by structural factors such as real GDP per capita, the degree of openness of the economy, and the share of nontradable goods in output. The only non-structural factor emerging from a preliminary analysis of several of these was the rate of growth of the quantity of money.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1034.

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Date of creation: Nov 1982
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Publication status: published as Kravis, Irving B. and Robert E. Lipsey. "Toward an Explanation of National Price Levels." Princeton Studies in International Finance, No. 52, (November 1983).
Handle: RePEc:nbr:nberwo:1034

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References

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  1. Aukrust, Odd, 1970. "PRIM I: A Model of the Price and Income Distribution Mechanism of an Open Economy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 16(1), pages 51-78, March.
  2. Heston, Alan, 1973. "A Comparison of Some Short-Cut Methods of Estimating Real Product Per Capita," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 19(1), pages 79-104, March.
  3. Irving B. Kravis & Robert E. Lipsey & Dennis M. Bushe, 1980. "Prices and Market Shares in the International Machinery Trade," NBER Working Papers 0521, National Bureau of Economic Research, Inc.
  4. Marina V. N. Whitman, 1975. "Global Monetarism and the Monetary Approach to the Balance of Payments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 491-556.
  5. Kravis, Irving B & Heston, Alan W & Summers, Robert, 1978. "Real GDP per Capita for More Than One Hundred Countries," Economic Journal, Royal Economic Society, vol. 88(350), pages 215-42, June.
  6. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-48.
  7. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  8. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September.
  9. Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, vol. 8(2), pages 193-246, May.
  10. Berglas, Eitan & Razin, Assaf, 1973. "Real exchange rate and devaluation," Journal of International Economics, Elsevier, vol. 3(2), pages 179-191, May.
  11. Ronald W. Jones & Douglas D. Purvis, 1981. "International Differences in Response to Common External Shocks: The Role of Purchasing Power Parity," Working Papers 419, Queen's University, Department of Economics.
  12. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-77, September.
  13. Irving B. Kravis & Robert E. Lipsey, 1971. "Price Competitiveness in World Trade," NBER Books, National Bureau of Economic Research, Inc, number krav71-1, October.
  14. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  15. Robert P. Flood, 1981. "Explanations of Exchange Rate Volatility and Other Empirical Regularities in Some Popular Models of the Foreign Exchange Market," NBER Working Papers 0625, National Bureau of Economic Research, Inc.
  16. Joshua Aizenman, 1983. "Modeling Deviations from Purchasing Power Parity (PPP)," NBER Working Papers 1066, National Bureau of Economic Research, Inc.
  17. Craig, Gary A, 1981. "A Monetary Approach to the Balance of Trade," American Economic Review, American Economic Association, vol. 71(3), pages 460-66, June.
  18. Kravis, Irving B, 1970. "Trade as a Handmaiden of Growth: Similarities between the Nineteenth and Twentieth Centuries," Economic Journal, Royal Economic Society, vol. 80(323), pages 850-72, December.
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