Balassa- Samuelson model

Question 1

assumptions of balassa-sam model

Answer 1

• Lower price of goods in the non- traded sector in
developing countries is mainly due to lower labour
productivity in the traded goods sector compared to
developed countries

• Assumption: equal wages between traded and non
traded sectors within each economy

• Wages: positively related to labour productivity

• Prices: determined positively by wages and inversely
by productivity (both, labour and capital, although
only labour productivity is consideded)

Question 2

does PPP hold in the traded sector?

Answer 2

Yes so SPt*=pt

Question 3

PPP work for non-traded goods?

Answer 3

No so SPN* >PN

and π*>π

Question 4

low wages in developing countries are due to..

Answer 4

…low productivity in the traded goods sector
• This leads to a relatively low price for nontraded goods even if productivity in the nontraded sector is equal for developed and developing countries.

• High productivity in rich countries’ tradable sector leads to high wages in its non- tradable
sector.