Editing Balassa–Samuelson effect (section)

==Alternative, and additional causes of the Penn effect==

Most professional economists accept that the '''Balassa–Samuelson effect''' model has some merit. However other sources of the [[Penn effect]] RER/[[Gross domestic product|GDP]] relationship have been proposed:

===Distribution sector===
In a 2001 [[International Monetary Fund]] working paper Macdonald & Ricci accept that relative productivity changes produce PPP-deviations, but argue that this is not confined to tradables versus non-tradable sectors. Quoting the abstract:<blockquote>An increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similarly to what a relative increase in the domestic productivity of tradables does.</blockquote>

=== Dutch disease ===
{{Further|Dutch disease}}

Capital inflows (say to the [[Netherlands]]) may stimulate [[currency]] appreciation through demand for [[money]]. As the RER appreciates, the competitiveness of the traded-goods sectors falls (in terms of the international price of traded goods).

In this model, there has been no change in real economy productivities, but money price productivity in traded goods has been exogenously lowered through currency appreciation. Since capital inflow is associated with high-income states (e.g. [[Monaco]]) this could explain part of the RER/Income correlation.

[[Yves Bourdet]] and [[Hans Falck]] have studied the effect of [[Cape Verde]] remittances on the traded-goods sector.<ref>[http://virtualcapeverde.net/news2/modules/Downloads/docs/emigration_dutch_disease.pdf Emigrants' Remittances And Dutch Disease<!-- Bot generated title -->] {{webarchive |url=https://web.archive.org/web/20050513123607/http://virtualcapeverde.net/news2/modules/Downloads/docs/emigration_dutch_disease.pdf |date=May 13, 2005 }}</ref> They find that, as local incomes have risen with a doubling of [[remittance]]s from abroad, the Cape Verde [[Exchange rate|RER]] has appreciated 14% (during the 1990s). The export sector of the Cape Verde economy suffered a similar fall in productivity during the same period, which was caused entirely by capital flows and not by the BS-effect.<ref group=note>The BS-hypothesis would still explain the Cape Verde price index rise in its own terms if the incomes from rising [[emigrant]]'s remittances were counted as local traded-goods 'productivity' increases. In their study of [[Cape Verde]], Bourdet & Falck found that the export sector strengthened during the 1990s period of currency appreciation, which might support the theory of "Competitive Appreciation" mentioned in the footnote above</ref>

=== Services are a 'superior good' ===
[[Rudi Dornbusch]] (1998) and others say that income rises can change the ratio of demand for goods and services (tradable and non-tradable sectors). This is because services tend to be [[superior goods]], which are consumed proportionately more heavily at higher incomes.

A shift in preferences at the [[microeconomics|microeconomic]] level, caused by an [[income effect]] can change the make-up of the consumer [[price index]] to include proportionately more expenditure on [[Service (economics)|services]]. This alone may shift the [[consumer price index]], and might make the non-traded sector look relatively less productive than it had been when demand was lower; if service quality (rather than quantity) follows diminishing returns to labour input, a general demand for a higher service quality automatically produces a reduction in per-capita productivity.

A typical labour market pattern is that high-[[Gross domestic product|GDP]] countries have a higher ratio of service-sector to traded-goods-sector employment than low-GDP countries. If the traded/non-traded consumption ratio is also correlated with the price level, the [[Penn effect]] would still be observed with labour productivity rising equally fast (in identical technologies) between countries.

===Protectionism===
Lipsey and Swedenborg (1996) show a strong correlation between the barriers to [[free trade]] and the domestic [[Consumer price index|price level]]. If wealthy countries feel more able to protect their native producers than [[developing nation]]s (e.g. with [[tariff]]s on agricultural imports) we should expect to see a correlation between rising [[Gross domestic product|GDP]] and rising prices (for goods in protected industries - especially food).

This explanation is similar to the BS-effect, since an industry needing protection must be measurably less productive in the world market of the [[commodity]] it produces. However, this reasoning is slightly different from the pure BS-hypothesis, because the goods being produced are 'traded-goods', even though protectionist measures mean that they are more expensive on the domestic market than the international market, so they will not be "[[export|traded]]" internationally<ref group=note>A typical reason for, and result of, [[trade barriers]], is that domestic productivity of some tradable-good is below international productivity. In order to [[Protectionism|protect]] domestic producers import barriers are raised, allowing the local price for the traded good to rise beyond the international price. If this were a common phenomenon then one of the key assumptions of the BS-hypothesis (that traded-goods follow the [[Purchasing power parity|PPP]]-hypothesis) would be invalid. However, the essence of the Balassa–Samuelson mechanism would still remain: Even without [[Free trade]] it may be harder to increase the productivity in the service sector as rapidly as in mass-production, so if money exchange rates are still based on the output of mass production the differentials in price level could still be caused by the Balassa–Samuelson effect.</ref>