Abstract
By means of duality theory, this paper generalizes the Balassa-Samuelson model as is used to explain the Penn effect; namely, the fact that national price levels tend to rise with per capita national incomes. The generalization made in this paper allows for any technological progress that is Hicks-neutral, Solow-neutral, Harrod-neutral, or any mixture of them. The implications of the enlarged models include, among others, the Balassa-Samuelson scenario, as well as a capital-intensity scenario that resembles Bhagwati’s. Those hypotheses emerge simultaneously when technical changes are, both, Hicksian and Solovian. The paper also presents an alternative model that is used to explain the apparent breakdown of the Penn effect in the case of the lowest-income countries.
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