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Can Firms’ Location Decisions Counteract the Balassa-Samuelson Effect?

  • Isabelle Méjean

This paper examines the determinants of relative prices in a model combining a Harrod–Balassa–Samuelson (HBS) mechanism and an endogenous location of traded good producers. Besides the standard HBS effect, asymmetric productivity improvements in the traded good sector push new firms to enter the market. This benefits local consumers who save on trade costs and exerts an upward pressure on relative wages. As a consequence, relative prices in the traded good sector either increase or fall in general equilibrium. In a panel cointegration framework, the wage effect is shown to dominate. This means the HBS effect is strengthened by the relocation of traded good producers.

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Paper provided by CEPII research center in its series Working Papers with number 2006-12.

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Date of creation: Jul 2006
Handle: RePEc:cii:cepidt:2006-12
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