Explaining Price Level Differences: New Evidence on the Balassa-Samuelson Effect

Abstract

We re-examine one of the most venerable results in economics, the Balassa–Samuelson effect of Balassa (1964) and Samuelson (1964). The central claim of Balassa–Samuelson is that nontradables explain price level differences across rich and poor economies. We test Balassa-Samuelson by quantifying the contribution of nontradables to cross-sectional price level variation for countries in the International Comparison Program (ICP). Our results suggest that nontradables explain up to two thirds of price level variation.

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