Export of Deindustrialization and the Anti-Balassa-Samuelson Effect: The Consequences of Productivity Growth Differential

Abstract

This paper focuses on productivity growth differentials between manufacturing and services, deindustrialization, and changes in the real exchange rate. Using a Ricardian trade model with a continuum of goods that introduces nontraded services, we investigate these interrelationships. The main results are as follows. (i) If deindustrialization proceeds in both home and foreign countries, then the ratio of the home manufacturing employment share to the foreign manufacturing employment share and the real exchange rate move in the same direction. (ii) Even if the productivity growth differential in the home country is greater than that in the foreign county, the extent of deindustrialization in the home country is not necessarily larger than that in the foreign country. On the contrary, it is possible that the foreign deindustrialization exceeds the home deindustrialization. (iii) Even if the productivity growth differential in the home country is greater than that in the foreign county, the real exchange rate of the home country can depreciate contrary to the expectation of the Balassa-Samuelson effect.