The Differential‐Productivity Hypothesis and Purchasing‐Power Parties: Some New Evidence*

Abstract

Abstract The structure of prices of goods entering into international trade relative to those that do not plays a key role in the Balassa‐Samuelson explanation of why countries ‘exchange rates differ systematically from their currencies’ purchasing power. the B‐S analysis leads to the proposition that the tradable‐nontradable price difference is lower for rich countries than for poor. This paper examines the gap, using prices collected by the International Comparison Programme. A variety of regressions were run to see if indeed the difference between tradable and nontradable price parities moved with income in the way B‐S expected. They did.

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