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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?," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 210-219.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:210-219
    DOI: 10.1016/j.iref.2018.03.022
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    References listed on IDEAS

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    1. Deardorff, Alan V & Courant, Paul N, 1990. "On the Likelihood of Factor Price Equalization with Nontraded Goods," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(3), pages 589-596, August.
    2. Hamid Beladi & Ravi Batra, 2004. "Traded and Nontraded Goods and Real Wages," Review of Development Economics, Wiley Blackwell, vol. 8(1), pages 1-14, February.
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    5. Bhagwati, Jagdish N, 1984. "Why Are Services Cheaper in the Poor Countries?," Economic Journal, Royal Economic Society, vol. 94(374), pages 279-286, June.
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    7. Ethier, Wilfred, 1972. "Nontraded Goods and the Heckscher-Ohlin Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 132-147, February.
    8. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72(6), pages 584-584.
    9. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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    Cited by:

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    2. Tarlok Singh, 2023. "Do terms of trade affect economic growth? Robust evidence from India," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(2), pages 491-521, April.

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    More about this item

    Keywords

    Balassa-Samuelson effect; Nontraded good; Factor price equalization;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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