note analyses the effects of differential productivity growth in the traded and non-traded goods sectors and of protectionism on the real exchange rate of Germany during the gold standard. Large deviations of the German real exchange rate occurred, despite the relatively open trading system and the high and increasing degree of commercial integration of Germany with the main gold standard countries. In Section II Balassa's [1964] model, which explains long-run deviations of the exchange rate from purchasing power parity on the basis of differential productivity growth between the traded and the non-traded goods sector, has been modified to take into account the existence of tariffs. In Section III empirical tests of the model are presented. They show that both differential productivity growth and changes in the degree of protectionism were important in* explaining the behaviour of the real exchange rate. Two appendices are attached to the note. Appendix I complements the main analysis of the note by measuring the effect of changes in the degree of protectionism and in the real exchange rate on the German trade balance. Appendix II contains a description of the sources of the data used.
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