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Why Are Goods Cheaper in Rich Countries? Beyond the Balassa-Samuelson Effect

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Author Info

  • Leon Podkaminer

    ()
    (The Vienna Institute for International Economic Studies, wiiw)

Abstract

Relative to consumer services, consumer goods tend to be cheaper in richer European countries. This tendency, customarily explained in terms of cost developments and/or foreign-trade considerations, can be a reflection of a demand-side regularity. An econometrically specified cross-country demand system indicates that goods are 'necessities' while services are 'luxuries'. Relative price of goods responds negatively to the rising supply of goods and positively to the rising supply of services, with the former response being much stronger. If the supply of both items were to rise at the same speed, the relative price of goods would have to fall.

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Bibliographic Info

Paper provided by The Vienna Institute for International Economic Studies, wiiw in its series wiiw Working Papers with number 64.

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Length: 20 pages including 2 Tables and 6 Figures
Date of creation: Apr 2010
Date of revision:
Publication status: Published as wiiw Working Paper
Handle: RePEc:wii:wpaper:64

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Related research

Keywords: relative prices; Balassa-Samuelson Effect; Engel Law; Almost Ideal Demand System; international consumption comparisons; structural change;

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References

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  1. De Gregorio, Jose & Giovannini, Alberto & Wolf, Holger C., 1994. "International evidence on tradables and nontradables inflation," European Economic Review, Elsevier, vol. 38(6), pages 1225-1244, June.
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Cited by:
  1. Leon Podkaminer, 2013. "Persistent gaps between purchasing power parities and exchange rates under the law of one price: a puzzle (partly) explained?," Bank i Kredyt, National Bank of Poland, Economic Institute, vol. 44(4), pages 333-352.

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