IDEAS home Printed from https://ideas.repec.org/p/iis/dispap/iiisdp446.html
   My bibliography  Save this paper

The Price of Development

Author

Listed:
  • Fadi Hassan

    (Trinity College Dublin)

Abstract

The Penn-Balassa-Samuelson e?ect is the stylized fact about the positive correlation between cross-country price level and per-capita income. This paper provides evidence that the price-income relation is actually non-linearand turns negative in low income countries. The result is robust along both cross-section and panel dimensions. Additional robustness checks show thatbiases in PPP estimation and measurement error in low-income countries do not drive the result. The different stage of development between countriescan explain this new ?nding. The paper shows that a model linking the price level to the process of structural transformation captures the non-monotonic pattern of the data.

Suggested Citation

  • Fadi Hassan, 2014. "The Price of Development," The Institute for International Integration Studies Discussion Paper Series iiisdp446, IIIS.
    • Handle: RePEc:iis:dispap:iiisdp446
    as

    Download full text from publisher

    File URL: https://www.tcd.ie/triss/assets/PDFs/iiis/iiisdp446.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Berthold Herrendorf & Ákos Valentinyi, 2012. "Which Sectors Make Poor Countries So Unproductive?," Journal of the European Economic Association, European Economic Association, vol. 10(2), pages 323-341, April.
    2. repec:pri:rpdevs:deaton_price_indexes_inequality_and_the_measurement_of_world_poverty_aer. is not listed on IDEAS
    3. Robert C. Feenstra & Robert Inklaar & Marcel P. Timmer, 2015. "The Next Generation of the Penn World Table," American Economic Review, American Economic Association, vol. 105(10), pages 3150-3182, October.
    4. Gollin, Douglas & Parente, Stephen L. & Rogerson, Richard, 2007. "The food problem and the evolution of international income levels," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1230-1255, May.
    5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    6. Margarida Duarte & Diego Restuccia, 2010. "The Role of the Structural Transformation in Aggregate Productivity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(1), pages 129-173.
    7. Restuccia, Diego & Yang, Dennis Tao & Zhu, Xiaodong, 2008. "Agriculture and aggregate productivity: A quantitative cross-country analysis," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 234-250, March.
    8. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    9. 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.
    10. L. Rachel Ngai & Christopher A. Pissarides, 2007. "Structural Change in a Multisector Model of Growth," American Economic Review, American Economic Association, vol. 97(1), pages 429-443, March.
    11. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(2), pages 407-443.
    12. Jo Thori Lind & Halvor Mehlum, 2010. "With or Without U? The Appropriate Test for a U‐Shaped Relationship," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 109-118, February.
    13. Qingyuan Du & Shang-Jin Wei & Peichu Xie, 2013. "Roads and the Real Exchange Rate," NBER Working Papers 19291, National Bureau of Economic Research, Inc.
    14. Robert C. Feenstra & Hong Ma & J. Peter Neary & D.S. Prasada Rao, 2013. "Who Shrunk China? Puzzles in the Measurement of Real GDP," Economic Journal, Royal Economic Society, vol. 123(12), pages 1100-1129, December.
    15. Angus Deaton, 2010. "Price Indexes, Inequality, and the Measurement of World Poverty," American Economic Review, American Economic Association, vol. 100(1), pages 5-34, March.
    16. repec:pri:rpdevs:presidential%20address%2017january%202010%20all.pdf is not listed on IDEAS
    17. D.S. Prasada Rao, 2004. "The Country-Product-Dummy Method: A Stochastic Approach to the Computation of Purchasing Power Parities in the ICP," CEPA Working Papers Series WP032004, School of Economics, University of Queensland, Australia.
    18. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    19. Donaldson, Dave & Atkin, David, 2015. "Who?s Getting Globalized? The Size and Implications of Intra-national Trade Costs," CEPR Discussion Papers 10759, C.E.P.R. Discussion Papers.
    20. Devereux, Michael B, 1999. "Real Exchange Rate Trends and Growth: A Model of East Asia," Review of International Economics, Wiley Blackwell, vol. 7(3), pages 509-521, August.
    21. Diewert, Erwin, 2008. "New Methodology for Linking the Regions," Economics working papers erwin_diewert-2008-9, Vancouver School of Economics, revised 09 Sep 2008.
    22. Angus Deaton & Alan Heston, 2010. "Understanding PPPs and PPP-Based National Accounts," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 1-35, October.
    23. repec:pri:rpdevs:presidential%20address%2017january%202010%20all is not listed on IDEAS
    24. Douglas Gollin & David Lagakos & Michael E. Waugh, 2014. "The Agricultural Productivity Gap," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 939-993.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nurasyikin Jamaludin & Shahnaz Ismail & Syamimi Ab Manaf, 2017. "Macroeconomic Variables and Stock Market Returns: Panel Analysis from Selected ASEAN Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 7(1), pages 37-45.
    2. Stahler Kevin & Subramanian Arvind, 2014. "Versailles Redux? Eurozone Competitiveness in a Dynamic Balassa-Samuelson-Penn Framework," Journal of Globalization and Development, De Gruyter, vol. 5(2), pages 129-176, December.
    3. Muhammad Hanif & Kiran Zafar, 2020. "Developments in Islamic Finance Literature: Evidence from Specialized Journals التطورات في أدبيات التمويل الإسلامي: أدلة من دوريات متخصصة," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 33(2), pages 3-23, July.
    4. Saeed Sazzad Jeris & Ridoy Deb Nath, 2021. "US banks in the time of COVID-19: fresh insights from the wavelet approach," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 349-361, June.
    5. Chowdhury, Anup & Uddin, Moshfique & Anderson, Keith, 2022. "Trading behaviour and market sentiment: Firm-level evidence from an emerging Islamic market," Global Finance Journal, Elsevier, vol. 53(C).
    6. Zuzana Gric & Josef Bajzik & Ondrej Badura, 2021. "Does Sentiment Affect Stock Returns? A Meta-analysis Across Survey-based Measures," Working Papers 2021/10, Czech National Bank.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hassan, Fadi, 2016. "The price of development: The Penn–Balassa–Samuelson effect revisited," Journal of International Economics, Elsevier, vol. 102(C), pages 291-309.
    2. Fadi Hassan, 2011. "The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited," CEP Discussion Papers dp1056, Centre for Economic Performance, LSE.
    3. Michael Fidora & Claire Giordano & Martin Schmitz, 2021. "Real Exchange Rate Misalignments in the Euro Area," Open Economies Review, Springer, vol. 32(1), pages 71-107, February.
    4. Gangopadhyay, Kausik & Mondal, Debasis, 2021. "Productivity, relative sectoral prices, and total factor productivity: Theory and evidence," Economic Modelling, Elsevier, vol. 100(C).
    5. Cai, Wenbiao, 2015. "Structural change accounting with labor market distortions," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 54-64.
    6. Chen, Chaoran, 2020. "Technology adoption, capital deepening, and international productivity differences," Journal of Development Economics, Elsevier, vol. 143(C).
    7. Federico Huneeus & Richard Rogerson, 2020. "Heterogeneous Paths of Industrialization," Working Papers 2020-23, Princeton University. Economics Department..
    8. Barker, Tom & Üngör, Murat, 2019. "Vietnam: The next asian Tiger?," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 96-118.
    9. Berthold Herrendorf & Ákos Valentinyi, 2012. "Which Sectors Make Poor Countries So Unproductive?," Journal of the European Economic Association, European Economic Association, vol. 10(2), pages 323-341, April.
    10. Murat Ungor, 2017. "Productivity Growth and Labor Reallocation: Latin America versus East Asia," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 24, pages 25-42, March.
    11. Claire Giordano, 2021. "How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(3), pages 365-404, July.
    12. Sposi, Michael, 2019. "Evolving comparative advantage, sectoral linkages, and structural change," Journal of Monetary Economics, Elsevier, vol. 103(C), pages 75-87.
    13. Robert Inklaar & D. S. Prasada Rao, 2017. "Cross-Country Income Levels over Time: Did the Developing World Suddenly Become Much Richer?," American Economic Journal: Macroeconomics, American Economic Association, vol. 9(1), pages 265-290, January.
    14. Roberto Samaniego, 2013. "Stages of Diversification and Industry Productivity Differences," 2013 Meeting Papers 774, Society for Economic Dynamics.
    15. Almås, Ingvild & Grewal, Mandeep & Hvide, Marielle & Ugurlu, Serhat, 2017. "The PPP approach revisited: A study of RMB valuation against the USD," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 18-38.
    16. Eiji Fujii, 2015. "Reconsidering The Price–Income Relationship Across Countries," Pacific Economic Review, Wiley Blackwell, vol. 20(5), pages 733-760, December.
    17. Mondal, Debasis, 2019. "Structural transformation and productivity growth in India during 1960–2010," Economic Modelling, Elsevier, vol. 82(C), pages 401-419.
    18. Trevor Tombe, 2012. "The Missing Food Problem," Working Papers tt0060, Wilfrid Laurier University, Department of Economics, revised 2012.
    19. Herrendorf, Berthold & Rogerson, Richard & Valentinyi, Ákos, 2014. "Growth and Structural Transformation," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 6, pages 855-941, Elsevier.
    20. Alvarez-Cuadrado, Francisco & Long, Ngo & Poschke, Markus, 2017. "Capital-labor substitution, structural change and growth," Theoretical Economics, Econometric Society, vol. 12(3), September.

    More about this item

    Keywords

    real exchange rate;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iis:dispap:iiisdp446. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maeve (email available below). General contact details of provider: https://edirc.repec.org/data/cetcdie.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.