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Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia

Takatoshi Ito (), Peter Isard and Steven Symansky

No 5979, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The paper tests the Balassa-Samuelson hypothesis (rapid economic growth is accompanied by real exchange rate appreciation because of differential productivity growth between tradable and nontradable sectors) using data of the APEC economies. Japan, Korea, Taiwan and, to a lesser extent, Hong Kong and Singapore, were proved to follow the Balassa-Samuelson path. These countries follow a similar industrialization pattern, increasing the weight of high value-added exports. Although Hong Kong and Singapore grew fast, their real exchange rates appreciated only moderately. High productivity growth in service sectors might have been the reason for this. Other fast-growing ASEAN countries, such as Thailand, Indonesia and Malaysia did not experience real appreciation. Closer examinations of various components of the Balassa-Samuelson hypothesis revealed that key assumptions are not uniformly supported: There is no uniform pattern for the movement of nontradable prices relative to tradable prices; and tradable prices (measured by common currency) do not show the international arbitrage.

JEL-codes: E31 F31 (search for similar items in EconPapers)
Date: 1997-03
Note: IFM
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Published as Ito, Takatoshi and Krueger, Anne O. 1999. Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues. Chicago: The University of Chicago Press. pp. 109-130.
Published as Economic Growth and Real Exchange Rate: An Overview of the Balassa-Samuelson Hypothesis in Asia , Takatoshi Ito, Peter Isard, Steven Symansky. in Changes in Exchange Rates in Rapidly Developing Countries: Theory, Practice, and Policy Issues , Ito and Krueger. 1999

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