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Balassa–Samuelson effect
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===Basic form of the effect=== The simplest model which generates a Balassa–Samuelson effect has two countries, two goods (one tradable, and a country-specific nontradable) and one factor of production, labor. For simplicity assume that productivity, as measured by marginal product (in terms of goods produced) of labor, in the nontradable sector is equal between countries and normalized to one. <math>MPL_{nt,1}=MPL_{nt,2}=1</math> where "nt" denotes the nontradable sector and 1 and 2 indexes the two countries. In each country, under the assumption of competition in the labor market the wage ends up being equal to the value of the marginal product, or the sector's price times MPL. (Note that this is not necessary, just sufficient, to produce the Penn effect. What is needed is that wages are at least related to productivity.) <math>w_1=p_{nt,1}*MPL_{nt,1}=p_{t}*MPL_{t,1}</math> <math>w_2=p_{nt,2}*MPL_{nt,2}=p_{t}*MPL_{t,2}</math> Where the subscript "t" denotes the tradables sector. Note that the lack of a country specific subscript on the price of tradables means that tradable goods prices are equalized between the two countries. Suppose that country 2 is the more productive, and hence, the wealthier one. This means that <math>MPL_{t,1}<MPL_{t,2}</math> which implies that <math>p_{nt,1}<p_{nt,2}</math>. So with a same (world) price for tradable goods, the price of nontradable goods will be lower in the less productive country, resulting in an overall lower price level.
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