Price Convergence: What Can the Balassa-Samuelson Model Tell Us?

PERENNIAL JOURNAL OF HISTORY

This study aims to revisit the assumptions of economic theory that lead to the predictions of competitive equilibrium theory. Extensive work has already been done to answer how well these assumptions of microeconomic theory approximate the real-world market. In this context, two kinds of tools can be found in the literature that tries to answer this question. One is experimental economics (EE) where individuals are involved in a simplified market that mirrors the real-world markets. Human behavior is observed here under an alternating set of rules. The second tool is agent-based Modeling (ABM) which approximates the real-world markets with artificial agents where every agent possesses unique characteristics and the market comprises a diverse set of decision rules. In ABM, computer simulations imitate human behavior. Our results, however, state that with Zero Intelligence agents, the market is not even closer to the level of prediction of a theoretical competitive market. It also mak...

Applied Economics Letters, 2004

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On the nominal side of economic convergence, the functional compatibility is globally reflected in the comparative price level (CPL). This is approximated through the ratio of the purchasing power parity of a given currency to its market exchange rate. The present paper examines the behavior of this variable in the European Union context, namely 19 countries already forming the Euro Zone, and the other nine ones that have to be also integrated into this common currency area. A simple analytical framework of CPL is skaetched, the main attention being paid to revealing its deep connection with the economic development level. An extended empirical analysis, covering 20-year statistical series (1995-2014) for all the 28 members of the European Union is presented. The particular position of the Romanian economy is separately examined. The previous evolution of Romania's CPL as against the EU level is completed by an econometric attempt to forecast it for the years 2015-2016. The simulations based on updating the 2012 Version of the Romanian Macromodel were used. Some conclusions and further research suggestions finalize the paper.

International Regional Science Review, 2005

This article examines the degree to which commodity prices have converged on world commodity markets over recent decades. Ideally, increases in communications, central bank activities, and globalization would suggest that commodity prices in spatially dispersed markets should become similar over time. To measure convergence, correlation, regression, cointegration, and vector autoregressive methods are employed. Comparable geographic data were assembled for six commodities: coffee, cotton, wheat, lead, copper, and tin, covering the period 1930 through 1998. Overall, the empirical results do not support the convergence hypothesis but rather a pattern of fluctuating divergences.

Monetary Policy & the Economy, 2012

This article explores the convergence in consumer prices for groups of countries within the European Economic and Monetary Union (EMU) and for selected non-EU countries, using detailed product-level data for 35 goods and services. It also analyzes the price gap between Austria and its major trading partners Germany and Italy. Within the euro area (the 11 founder members), price level convergence has been found to have occurred primarily in the run-up to the launch of euro banknotes and coins. Only in the case of consumer goods, such as personal transport equipment, clothing and footwear, and audio-visual, photographic and information processing equipment, did price levels continue to converge across the euro area countries also after the cash changeover. Compared with the other groups of countries reviewed here, food and services price levels converged to a much lesser extent or not at all in the euro area. However, during the whole period considered the variation in consumer prices...

2003

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Journal of Economics Zeitschrift f�r National�konomie, 1997

In the last 10-15 years a lot of attempts has been devoted to study the classical process of convergence of "market prices" toward "natural prices." The two forces that one has thought could achieve this target were capital mobility, that determines the dynamics of output, and demand-supply forces, that determine the dynamics of prices. In this article a model of classical competition is proposed in which a full-cost pricing mechanism is adopted in the rule of evolution of market prices. An asymptotical stability result of long-run equilibrium is proved for a two-commodity model with and without a final demand.

2014

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Economics Bulletin, 2010

This article assesses the Balassa and Samuelson effect which offers an explanation of the differences in international prices based on productivity disparity between tradables and nontradables. It argues that although the Balassa and Samuelson effect provides a reasonable explanation for the deviations in price levels between countries that export similar types of commodities, it is less compelling in terms of explaining the price differences between low and high income countries, as these countries typically export dissimilar types of commodities.