Economics · International Trade Theories & PPP
Which of the following statements regarding the Balassa-Samuelson Effect and its impact on Purchasing Power Parity (PPP) is INCORRECT?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1According to this effect, PPP tends to overestimate the price levels in poor countries because it does not account for the fact that non-tradables are significantly cheaper in those nations.
- 2In wealthy countries, faster productivity growth in the traded sectors raises wages across the entire economy, including the non-traded sectors.
- 3The effect posits that high productivity growth within the non-traded service sectors of wealthy nations leads to lower price levels for services, thereby validating the Law of One Price.✓
- 4The Balassa-Samuelson Effect explains that Purchasing Power Parity (PPP) often fails because it ignores the price differences in non-traded goods and services such as real estate.
Correct answer
The effect posits that high productivity growth within the non-traded service sectors of wealthy nations leads to lower price levels for services, thereby validating the Law of One Price.
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