BALASSA-

SAMUELSON

EFFECT

also known as Harrod–Balassa–Samuelson
effect (Kravis and Lipsey 1983), the Ricardo–
Viner–Harrod–Balassa–Samuelson–Penn–
Bhagwati effect (Samuelson 1994

)

Béla Alexander Balassa (6 April 1928 –

10 May 1991) was a Hungarian economist
and world-renowned professor at Johns
Hopkins University and a consultant for
the World Bank. Balassa is most famous
for his work on the relationship between
purchasing power parity and cross-country
productivity differences

Paul

Samuelson

was

an

economist. He received a Ph.D.
from Harvard and taught at
Massachusetts

Institute

of

Technology from 1940. For his
fundamental contributions to
nearly

all

branches

of

economics, he became in 1970
the third person to be awarded
the Nobel Prize in Economic
Sciences.

So what is it exactly?

In particular, it captures the impact of higher

productivity growth in terms of internationally
traded goods – typically manufactures – on the
relative prices and then on the real equilibrium
exchange rate, defined precisely by the ratio
between the price index of tradable goods and
the price index of non-traded goods.

How does it work?

South of England

North of England

>

=

So basically because of productivity

in the different countries we have

different prices of the same good

that caused Purchasing Power Parity

and the Big Mac Index

PPPs

Purchasing power parities (PPPs) are

indicators of price level differences across
countries.

They indicate how many currency
units a particular quantity of goods
and services costs in different countries.

Penn effect

The Penn effect is the economic finding that

real income ratios between industrial and
developing

countries

are

always

overstated if converted at market
exchange rates because the price level is
higher in richer countries.

Opposite to the law of one price

The law of one price says that the same item

cannot sustain two different sale prices in
the same market. The intuition for this law is
that all sellers will flock to the highest
prevailing price, and all buyers to the lowest
current market price. In an efficient market
the convergence on one price is instant.

Can you imagine that situation?

Thank you! 