TY - UNPB
T1 - A Spatial Explanation for the Balassa-Samuelson Effect
AU - Karádi, Péter A9
AU - Koren, Miklós
PY - 2008
Y1 - 2008
N2 - We propose a simple spatial model to explain why the price level is higher in rich countries. There are two sectors: manufacturing, which is freely tradable, and non-tradable services, which have to locate near customers in big cities. As countries develop, total factor productivity increases simultaneously in both sectors. However, because services compete with the population for scarce land, labor productivity will grow slower in services than in manufacturing. Services become more expensive, and the aggregate price level becomes higher. The model hence provides a theoretical foundation for the Balassa--Samuelson assumption that productivity growth is slower in the non-tradable sector than in the tradable sector. Empirical results confirm two key implications of the theory. First, we compare countries where land is scarce (densely populated, highly urban countries) to rural countries. The Balassa--Samuelson effect is stronger among urban countries. Second, we compare sectors that locate at different distance to consumers. The Balassa--Samuelson effect is stronger within sectors that locate closer to consumers.
AB - We propose a simple spatial model to explain why the price level is higher in rich countries. There are two sectors: manufacturing, which is freely tradable, and non-tradable services, which have to locate near customers in big cities. As countries develop, total factor productivity increases simultaneously in both sectors. However, because services compete with the population for scarce land, labor productivity will grow slower in services than in manufacturing. Services become more expensive, and the aggregate price level becomes higher. The model hence provides a theoretical foundation for the Balassa--Samuelson assumption that productivity growth is slower in the non-tradable sector than in the tradable sector. Empirical results confirm two key implications of the theory. First, we compare countries where land is scarce (densely populated, highly urban countries) to rural countries. The Balassa--Samuelson effect is stronger among urban countries. Second, we compare sectors that locate at different distance to consumers. The Balassa--Samuelson effect is stronger within sectors that locate closer to consumers.
UR - https://m2.mtmt.hu/api/publication/2709759
M3 - Working paper
T3 - CeFiG Working Papers ; 4.
BT - A Spatial Explanation for the Balassa-Samuelson Effect
PB - Center for Firms in the Global Economy (CeFiG)
CY - Budapest
ER -