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Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia

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Author Info
Takatoshi Ito
Peter Isard
Steven Symansky

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Abstract

The paper tests the Balassa-Samuelson hypothesis (rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and nontradable sectors) using data of the APEC economies. Japan, Korea, Taiwan and, to a lesser extent, Hong Kong and Singapore, were proved to follow the Balassa-Samuelson path. These countries follow a similar industrialization pattern, increasing the weight of high value-added exports. Although Hong Kong and Singapore grew fast, their real exchange rates appreciated only moderately. High productivity growth in service sectors might have been the reason for this. Other fast-growing ASEAN countries, such as Thailand, Indonesia and Malaysia did not experience real appreciation. Closer examinations of various components of the Balassa-Samuelson hypothesis revealed that key assumptions are not uniformly supported: There is no uniform pattern for the movement of nontradable prices relative to tradable prices; and tradable prices (measured by common currency) do not show the international arbitrage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5979.

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Date of creation: Mar 1997
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Handle: RePEc:nbr:nberwo:5979

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
F31 - International Economics - - International Finance - - - Foreign Exchange

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  1. Patrick K. Asea, 1994. "The Balassa-Samuelson Model: A General Equilibrium Appraisal," UCLA Economics Working Papers 709, UCLA Department of Economics. [Downloadable!]
  2. Takatotshi Ito, 1996. "Japan and the Asian Economies: A 'Miracle' in Transition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 205-272. [Downloadable!]
  3. Alwyn Young, 1992. "A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 13-64 National Bureau of Economic Research, Inc. [Downloadable!]
  4. Jose De Gregorio & Holger C. Wolf & Alberto Giovannini, 1994. "International Evidence on Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
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  5. Marston, Richard C., 1990. "Systematic movements in real exchange rates in the G-5 : Evidence on the integration of internal and external markets," Journal of Banking & Finance, Elsevier, vol. 14(5), pages 1023-1044, November. [Downloadable!] (restricted)
  6. Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Blackwell Publishing, vol. 2(3), pages 244-67, October.
  7. Tamim Bayoumi & Peter Isard & Steven A. Symansky & Takatoshi Ito, 1996. "Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region," IMF Occasional Papers 145, International Monetary Fund.
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