The Relative Price of Non-traded Goods in an Imperfectly Competitive Economy: Empirical Evidence for G7 Countries

J. Coto-Martinez and Juan Reboredo

Working Papers from Department of Economics, City University London

Abstract: In this paper, we consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa-Samuelson framework. Under imperfect competition in the two sectors, relative prices depend on both productivity differentials and mark-up differentials. We test this implication using a panel of sectors for the seven major OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials. Unlike the original Balassa-Samuelson model, aggregate demand could affect the real exchange rate by changing the mark ups. The empirical results show that aggregate demand fluctuations lead to changes on the mark-ups.

Keywords: Balassa-Samuelson hypothesis; real exchange rate; relative prices; imperfect competition (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:cty:dpaper:07/14

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