Resumen de Explaining price level differences: New evidence on the Balassa-Samuelson effect

Lein-Lein Chen, Seungmook Choi, John Devereux

• We re-examine one of the most venerable results in economics, the Balassa-Samuelson effect of Balassa (1964) and Samuelson (1964). The central claim of Balassa-Samuelson is that nontradables explain price level differences across rich and poor economies. We test Balassa-Samuelson by quantifying the contribution of nontradables to cross-sectional price level variation for countries in the International Comparison Program (ICP). Our results suggest that nontradables explain up to two thirds of price level variation.