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The Balassa-Samuelson Model: A General-Equilibrium Appraisal

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  • Asea, Patrick K
  • Mendoza, Enrique G

Abstract

We derive two key propositions of the Balassa-Samuelson model as long-run balanced growth implications of a neoclassical general equilibrium model. The propositions are that productivity differentials determine international differences in nontradable relative prices and deviations from PPP reflect differences in nontradable prices. Closed-form solutions are obtained and tested using panel methods applied to long-run components of OECD sectoral data computed using the Hodrick-Prescott filter. The results indicate that labor productivity differentials help explain international low-frequency differences in relative prices. However, predicted nontradable relative prices are less successful in explaining long-run deviations from PPP. Copyright 1994 by Blackwell Publishing Ltd.

Suggested Citation

  • Asea, Patrick K & Mendoza, Enrique G, 1994. "The Balassa-Samuelson Model: A General-Equilibrium Appraisal," Review of International Economics, Wiley Blackwell, vol. 2(3), pages 244-267, October.
  • Handle: RePEc:bla:reviec:v:2:y:1994:i:3:p:244-67
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