How does Balassa-Samuelson explain that the Prich > S P*poor?
- productivity higher in rich
- Wages in tradable are higher
- Wages in non tradable are higher
- Prices in non-tradable are higher
What is the Law of one Price?
Products listed in different currencies are equal if converted due to arbitrage
How does PPP define the exchange rate?
S = Pg / P*g
What is the definition of the Purchasing Power Parity (PPP)?
If LOP then P = S x P*
What is the are the Absolute and Relative PPP?
- Absolute PPP: P = S x P*
- Relative PPP: dP/P = dS/S + dP/P
What is the link between relative PPP and inflation?
If we turn the formula round we get dS/S = dP/P - dP/P, is the excess inflation between H over F
Do the Absolute and Relative PPP always hold?
If the Absolute PPP holds, then so does the Relative PPP, but vice versa NO
What does Balassa-Samuelson explain?
Using empircal observation that the price level is higher in rich countries because of higher productivity in the tradables sector
What are the reasons for deviations from the PPP?
- Trade costs and impediments
- tradeables vs non-tradeables
- Productivity differentials (Balassa -Samuelson)
How do we calculate under and overvaluation?
Calculate exchange rate according to LOP, Sg = Pg / Pg* and then calculate under/overvaluation via S-Sg / Sg
