An international comparison of the price of nontraded goods

Abstract

alassa [1964] argues that purchasing power parity calculations are subject to a productivity bias as nontraded goods are relatively more expensive in high income countries. The objective of this note is to analyse three sets of data to test whether or not the price of nontraded goods does display this type of behavior. We first use the price of haircuts, which can be viewed as a classic nontraded good [Samuelson, 1964, p. 148]. We then use the Kravis et al. [1978] data on prices of consumer goods in fifteen countries. The final set of data refers to the movement over time of the relative price of nontraded goods in each of nine countries. All the results give strong support to the Balassa hypothesis. Before turning to the results we first give an exposition of Balassa's analysis of nontraded goods and the exchange rate.