Question

Purchasing Power Parity and Monetary Models of Exchange Rates

What is Balassa-Samuelson? Explain how comparative advantage, productivity, and domestic labor markets interact to generate this effect. Explain how this effect would change if all goods were tradable.

Answer 1

Purchasing Power parity and monetary models of Exchange Rates Are :-
Goods that can be easily shipped sell for roughly the same price everywhere--there are differences due to taxes and transportation costs and such things, of course, but there is no reason to expect that say an iPad will sell for substantially less in a poorer country than in a richer country. Goods that are hard to ship, however, most notably services will sell for substantially less in a developing country.As per Balassa-Samuelson effect, the optimal inflation rate for developing economies is higher than it is for developed countries. The prices keep increasing as people start to consume more goods and services with their increased wages. With this labor markets experiences a steep increase in wage and labor demand too raises, productivity will also increase when the factors of production like land, labor and capital would be used efficiently. The tradable vs non-tradable goods too experiences high wage growth and labor demand.