The Balassa‐Samuelson Model: A General‐Equilibrium Appraisal*

Abstract

Abstract 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. Unless very sophisticated indeed, PPP is a misleadingly pretentious doctrine, promising us what is rare in economics, detailed numerical predictions. (Paul A. Samuelson, 1964, p. 153)

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