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Why Are Goods Cheaper in Rich Countries? Beyond the Balassa-Samuelson Effect

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  • Leon Podkaminer

    () (The Vienna Institute for International Economic Studies, wiiw)

Abstract

Relative to consumer services, consumer goods tend to be cheaper in richer European countries. This tendency, customarily explained in terms of cost developments and/or foreign-trade considerations, can be a reflection of a demand-side regularity. An econometrically specified cross-country demand system indicates that goods are 'necessities' while services are 'luxuries'. Relative price of goods responds negatively to the rising supply of goods and positively to the rising supply of services, with the former response being much stronger. If the supply of both items were to rise at the same speed, the relative price of goods would have to fall.

Suggested Citation

  • Leon Podkaminer, 2010. "Why Are Goods Cheaper in Rich Countries? Beyond the Balassa-Samuelson Effect," wiiw Working Papers 64, The Vienna Institute for International Economic Studies, wiiw.
  • Handle: RePEc:wii:wpaper:64
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    File URL: https://wiiw.ac.at/why-are-goods-cheaper-in-rich-countries-beyond-the-balassa-samuelson-effect-dlp-2130.pdf
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Leon Podkaminer, 2013. "Persistent gaps between purchasing power parities and exchange rates under the law of one price: a puzzle (partly) explained?," Bank i Kredyt, Narodowy Bank Polski, vol. 44(4), pages 333-352.

    More about this item

    Keywords

    relative prices; Balassa-Samuelson Effect; Engel Law; Almost Ideal Demand System; international consumption comparisons; structural change;

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies

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