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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
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Handle: RePEc:cii:cepidt:2006-12
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  1. Alan M. Taylor & Paul Bergin & Reuven Glick, 2005. "Productivity, Tradability, and the Long-Run Price Puzzle," Working Papers 511, University of California, Davis, Department of Economics.
  2. Maurice Obstfeld & Kenneth Rogoff, 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Working Papers 7777, National Bureau of Economic Research, Inc.
  3. Giancarlo Corsetti & Philippe Martin & Paolo Pesenti, 2005. "Productivity Spillovers, Terms of Trade and the 'Home Market Effect'," Sciences Po publications 4964, Sciences Po.
  4. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2001. "Understanding European Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0120, Vanderbilt University Department of Economics.
  5. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, MIT Press, vol. 120(3), pages 865-915, August.
  6. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  7. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  8. Venables, Anthony J, 1993. "Equilibrium Locations of Vertically Linked Industries," CEPR Discussion Papers 802, C.E.P.R. Discussion Papers.
  9. Hummels, David, 2001. "Time as a Trade Barrier," GTAP Working Papers 1152, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  10. MacDonald, Ronald & Ricci, Luca Antonio, 2007. "Real exchange rates, imperfect substitutability, and imperfect competition," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 639-664, December.
  11. Jose De Gregorio & Alberto Giovannini, 1993. "International Evidence on Tradables and Nontradable Inflation," NBER Working Papers 4438, National Bureau of Economic Research, Inc.
  12. Behrens, Kristian & Lamorgese, Andrea & Ottaviano, Gianmarco & Tabuchi, Takatoshi, 2004. "Testing the Home Market Effect in a Multi-Country World: The Theory," CEPR Discussion Papers 4468, C.E.P.R. Discussion Papers.
  13. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Working Papers 96-02, University of Washington, Department of Economics.
  14. Irving B. Kravis & Robert E. Lipsey, 1982. "Towards an Explanation of National Price Levels," NBER Working Papers 1034, National Bureau of Economic Research, Inc.
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