The Relative Price of Non-traded Goods in an Imperfectly Competitive Economy: Empirical Evidence for G7 Countries

Coto-Martinez, J. & Reboredo, J. C. (2007). The Relative Price of Non-traded Goods in an Imperfectly Competitive Economy: Empirical Evidence for G7 Countries (07/14). London, UK: Department of Economics, City University London.

Abstract

In this paper, we consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa-Samuelson framework. Under imperfect competition in the two sectors, relative prices depend on both productivity differentials and mark-up differentials. We test this implication using a panel of sectors for the seven major OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials. Unlike the original Balassa-Samuelson model, aggregate demand could affect the real exchange rate by changing the mark ups. The empirical results show that aggregate demand fluctuations lead to changes on the mark-ups.

Publication Type:	Monograph (Discussion Paper)
Publisher Keywords:	Balassa-Samuelson hypothesis, real exchange rate, relative prices, imperfect competition
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs > Economics > Discussion Paper Series