The Balassa-Samuelson Model: A General-Equilibrium Appraisal

• Published in: Review of international economics Vol. 2; no. 3; pp. 244 - 67
• Main Authors: Asea, Patrick K, Mendoza, Enrique G
• Format: Journal Article
• Language: English
• Published: Wiley Blackwell 01.10.1994
• Series: Review of International Economics
• ISSN: 0965-7576; 1467-9396
• DOI: 10.1111/j.1467-9396.1994.tb00043.x

We derive two key propositions of the Balassa-Samuelson model as long-run balanced growth implications of a neoclassical general equilibrium model. The propositions are that productivity differentials determine international differences in nontradable relative prices and deviations from PPP reflect differences in nontradable prices. Closed-form solutions are obtained and tested using panel methods applied to long-run components of OECD sectoral data computed using the Hodrick-Prescott filter. The results indicate that labor productivity differentials help explain international low-frequency differences in relative prices. However, predicted nontradable relative prices are less successful in explaining long-run deviations from PPP. Copyright 1994 by Blackwell Publishing Ltd.