Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa-Samuelson Hypothesis Revisited

Ehsan Choudhri () and Lawrence Schembri ()

No 10-06, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded-goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate.

Keywords: Real exchange rate; Balassa-Samuelson model; Productivity; Terms of trade (search for similar items in EconPapers)
JEL-codes: F31 F41 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2010-05, Revised 2010-11
New Economics Papers: this item is included in nep-cba, nep-int and nep-opm
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Citations: View citations in EconPapers (28)

Published: Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa-Samuelson Hypothesis Revisited – revised version in Review of International Economics, Vol. 18, No. 5 (November 2010), pp. 924–936

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http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9396.2010.00917.x/pdf

Related works:
Journal Article: Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa–Samuelson Hypothesis Revisited (2010)
Working Paper: Productivity, the Terms of Trade, and the Real Exchange Rate: The Balassa-Samuelson Hypothesis Revisited (2009)
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