Samuelson Model Research Articles

Real Convergence, Capital Flows, and Competitiveness in Central and Eastern Europe

AbstractThe paper scrutinizes the role of capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa–Samuelson model by international capital markets to trace cyclical deviations of real exchange rates from the productivity‐driven equilibrium path. Panel estimations for the period from 1998 to 2009 reveal strong evidence for the Balassa–Samuelson effect and mixed results for the role of capital flows for international competitiveness of the Central and Eastern European countries.

Capital Accumulation and Convergence in a Small Open Economy

AbstractOutward‐oriented economies seem to grow faster than inward‐looking ones. Does the literature on convergence have anything to say on this? In the dynamic Heckscher–Ohlin–Samuelson model, with factor‐price equalization, there is no convergence of incomes. This is because with identical preferences and return to capital, irrespective of initial levels, the growth rates of consumption are the same. In the specific factors' model, there is factor‐price equalization in the long run, but incomes depend on endowments of non‐accumulable factors. Different specifications for the intersectorally mobile factors have different implications for development (as well as convergence).

Demography and Growth: A Unified Treatment of Overlapping Generations

We construct a unified overlapping-generations (OLG) framework of equilibrium growth that includes the Blanchard “perpetual youth” model, the Samuelson model, and the infinitely-lived representative agent growth model as limit specifications of a “realistic,” two-parameter survivorship function. We analyze how exogenous changes in demographic conditions affect the equilibrium growth and savings rates by computing equilibrium rates under different specifications of the survivorship function. Differences in population growth rates, life-expectancies, retirement durations, and the degree of concavity of the survivorship function are found to have significant impacts on equilibrium growth rates. The observed effects are consistent with some cross-country correlations between demographic conditions and growth rates. We also identify a potential “Malthusian growth trap” in economies where life expectancy is short, fertility rates are high, and households work most of their lives - conditions often found in less developed economies.

DEMOGRAPHY AND GROWTH: A UNIFIED TREATMENT OF OVERLAPPING GENERATIONS

We construct a unified overlapping-generations framework of equilibrium growth that includes the Blanchard “perpetual youth” model, the Samuelson model, and the infinitely lived–agent model as limit specifications for a “realistic” two-parameter survivorship function. We assess how the limit specifications compare with the general survival function, and analyze how exogenous changes in demographic conditions affect equilibrium growth and savings rates. Predicted effects are consistent with some cross-country correlations between demographic conditions and growth rates.

Price Levels and Economic Growth: Making Sense of Revisions to Data on Real Incomes

The price surveys from the 2005 International Comparison Program (ICP) imply substantially lower levels of GDP at purchasing power parity (PPP) for many developing countries than prior estimates. While some observers have questioned the data, this paper argues that the pattern of changes in PPPs between ICP rounds makes economic sense. Consistently with the original Balassa–Samuelson model, more rapidly growing economies experienced steeper increases in their PPPs relative to official exchange rates. This effect was even stronger for poor countries. Taking account of this effect would reduce the need for such large data revisions when new ICP data become available.

A note on quantitative trade restrictions, income effects and wage inequality

This paper examines the effects of conversion of one type of physical trade restrictions into another on the intra-country wage inequality in a standard 2 × 2 × 2 Heckscher–Ohlin–Samuelson model. It shows that a conversion of an import-quota into an equivalent voluntary export restraint raises wage-inequality in the country importing the unskilled-labor intensive good and lowers the wage-inequality in its trading partner. This result does not depend on whether the unskilled-labor intensive good or the skilled-labor intensive good was initially subject to an import quota. Conversion of the import-quota into an equivalent import tariff, on the other hand, may lead to a rise in wage inequality in both countries. The driving force behind these results is the real income effect that conversion of one type trade restriction instrument into another results in.

Sectoral Capital–Labor Ratios and Total Factor Productivity: Evidence from Asia

AbstractThis paper examines the relationship between sectoral capital–labor ratios and total factor productivity (TFP) for six Asian economies in the context of the Balassa–Samuelson model. A strong prediction of the model is that the capital–labor ratios in both the traded‐ and nontraded‐goods sectors depend on the TFP in the traded‐goods sector. Both single‐equation and panel cointegration tests support this implication of the model.

Productivity Shocks And Real Exchange Rates In The Long-Run: Evidence For The G3 And EU Economies

This paper analyses the relationship between productivity and real exchange rates in Japan, United States, Germany and the European Union. Prior studies have revealed that productivity shocks have a minimum effect on real exchange rate fluctuations. This paper shows that productivity shocks account for most of the long-run fluctuations in the real exchange rates when long-run equilibrium relationships of the fundamental variables are considered. This would support empirical support of the Balassa Samuelson model where the main sources of long-run deviations for purchasing power parity are the differences in relative productivity.

Real exchange rate, productivity and labor market frictions

We extend the classic Balassa–Samuelson model to an environment with search unemployment. We show that the classic Balassa–Samuelson model with the assumption of full employment emerges as a special case of our more generalized model. In our generalized model, the degree of labor market matching efficiency affects the strength of the structural relationship between the real exchange rate and sectoral productivity through influencing labor’s choice between employment and unemployment as well as movement across sectors. When the relative labor market matching friction is high, search unemployment is high and the standard Balassa–Samuelson effect may not hold. Empirical evidence supports our theory: controlling for differences in labor market frictions across countries provides a better fit in estimating the Balassa–Samuelson effect.

The Balassa–Samuelson model of purchasing power parity and Chinese exchange rates

Our principal purpose here is to assess the extent to which both the official and black market exchange rates for the Chinese economy exhibit compatibility with the Balassa–Samuelson model over the period from 1985 to 2006. We employ annual measures of inflation and industry input on an aggregated, disaggregated and sector basis, all of which have been especially constructed for this study. Both the time series and panel cointegration tests applied to this data are generally inconsistent with the prediction of the Balassa–Samuelson model that the tradable goods sector is compatible with purchasing power parity. However, our analysis also shows that other predictions of the Balassa–Samuelson model – most notably that there will be a strong long-run relationship between the real exchange rate and the relative productivity differential between China and the U.S. – does hold up for the Chinese economy. Moreover, the black market exchange rate appears to be more consistent with the predictions of the Balassa–Samuelson model than the official exchange rate.

Does Trade Expansion Still Promote Employment in Korea?

According to the Heckscher–Ohlin–Samuelson (HOS) model, trade can be an important source of job gains for developing economies, but, conversely, result in job losses for developed economies. Empirical research to date, however, has provided mixed results regarding the direction and size of the employment effects for both developing and developed economies. This paper attempts to evaluate the employment implications of trade for Korea over the 1975–2000 period. Korea merits attention because it has successfully transformed itself from a developing to a semi-developed economy during this period. Empirical results show that trade has indeed played an important role in enhancing job opportunities in Korea throughout this period, but its role as a job creator has diminished since 1985, suggesting that such a role could soon end, or even reverse.

Consumption efficiency hypothesis and the HOS model: Some counterintuitive results

We show how accommodation of the consumption efficiency hypothesis can explain the existence of involuntary unemployment in the two-by-two Heckscher–Ohlin–Samuelson (HOS) model. Although the workers consume both the commodities their nutritional efficiency depends on the consumption of one commodity only. An increase in the relative price of the capital-intensive (labour-intensive) goods raises (lowers) the effective employment in the economy. The effects of commodity price changes on the output levels of the two sectors might be perverse. These results are different from the standard HOS results.

What do we know about the real exchange rate? A classical cost of production story

This paper argues that exchange rate models rooted in the theory of Purchasing Power Parity (PPP) and balanced trade are fundamentally mis-specified, as evidenced by the disjuncture between: (1) the empirical evidence, which largely refutes PPP; and (2) the empirical result that ‘real’ productivity shocks are associated with observed secular trends in exchange rates. In the former case we have a theory without convincing evidence, and in the latter case we have empirical evidence in want of a consistent theory. If looked at from the perspective of a ‘cost of production’ theory of prices, such empirical results might not be so theoretically anomalous. So-called ‘real’ variables (especially productivity and unit labor costs), let in through the side door as ‘shocks’ to PPP equilibrium, may in fact be part and parcel of the formation of prices of production on an international scale through capitalist competition. The primary conclusion is that the empirical evidence supports a cost of production theory of the terms of trade and the real exchange rate. The empirical evidence in support of the Balassa–Samuelson model of the exchange rate is re-interpreted in this light. In this interpretation, parity holds only in terms of rates of return on investment which, in the classical tradition, are presumed to equalize across industries internationally.

Drift effect under timing without observability: Experimental evidence

We provide experimental evidence of [Binmore, K., Samuelson, L., 1999. Evolutionary drift and equilibrium selection. Review of Economic Studies 66, 363–393.] insights into modelling the process through which equilibrium is selected. They proposed the concept of drift to describe the effect of perturbations on the dynamic process leading to equilibrium in evolutionary games with boundedly rational agents. We test two versions of the modified Dalek game within a random-matched population. We also impose that the first mover chooses first (‘timing’) but the second mover is not informed of the first mover's choice (‘lack of observability’) to emphasize the learning process taking place within the population. Our results support Binmore and Samuelson's model.

The comparative statics of industry-level produced-input-use in HOS trade theory

We consider the industry-level use of inputs, per unit of gross output, in a Heckscher–Ohlin–Samuelson model in which not only land and labour but the two produced commodities are used as inputs. The rate of interest is zero throughout and all the standard assumptions are made. When alternative equilibria are compared, the use of land (of labour) is always lower when the real rent (real wage) is higher. But even the assumption of Hicksian substitution everywhere does not permit comparable conclusions concerning the use of produced inputs. This is because a produced input can never become more expensive relative to all three other inputs (unlike a primary input).

Explaining the real exchange rate in Kazakhstan, 1996–2003: Is Kazakhstan vulnerable to the Dutch disease?

Kazakhstan possesses extensive natural resource reserves expected to yield significant export revenues. Since independence in 1991, the composition of exports has changed in favor of energy-related sectors. In the context of such evidence and considerable expected future revenues, researchers have pointed to possible Dutch disease effects. This paper examines whether Kazakhstan is vulnerable to this condition. Using an extended version of the Balassa–Samuelson model including the price of oil, we find evidence that changes in those terms had a significant effect on the real exchange rate during 1996–2003, suggesting symptoms of significant Dutch disease effects in Kazakhstan.

Traded and Nontraded Goods and Real Wages

AbstractThe paper explains most, if not all, observations made by the empirical literature regarding the behavior of skilled and unskilled real wages in the United States, especially those since 1980. Generalizing the Stopler–Samuelson theorem, the authors show that the nontraded sector is critical to explaining the effects of changes in the price of traded goods on relative and absolute wages. Factor‐intensities play their role as in the traditional Stolper–Samuelson model, but the output of the nontraded sector matters as well. Specifically, freer trade benefits capital and hurts both the skilled and unskilled labor if the import as well as the nontraded sectors contract. This is a new result to the literature on Stolper–Samuelson issues.

Asymmetric adjustment costs in simple general equilibrium models

This paper demonstrates that the introduction of asymmetric adjustment costs in a simple general equilibrium framework establishes a meaningful link between factor price determination and output determination, breaking the analytically convenient dichotomy of the Heckscher–Ohlin–Samuelson model. The possibility of trade between seemingly similar countries that differ in their adjustment technologies is visited.

Modifications of the Balassa–Samuelson Model: The Effects of Balanced Growth and Capital Accumulation

In this paper modified versions of the Balassa–Samuelson model are developed. We stress the effects of balanced productivity growth and capital accumulation, which is often ignored or not fully understood in existing studies. Our theoretical analysis shows that these effects and the differential productivity growth effect can be presented in a unified framework. Empirical estimates using 1970–1990 sectoral data for the OECD show that our modified models are more suited to the data than the commonly used Balassa–Samuelson model. J. Japan. Int. Econ., March 2002, 16(1) pp. 31–49. Faculty of Economics, Nagasaki University, 4-2-1 Katafuchi, Nagasaki 850-8506, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: F36; F41; F43.

Capital–Labor Ratios and Total Factor Productivity in the Balassa–Samuelson Model

The paper investigates the relationship between sectoral capital–labor ratios and total factor productivity (TFP) in the context of the Balassa–Samuelson model. It is shown that, under certain assumptions, the model implies that both traded‐ and nontraded‐goods sectors’ capital–labor ratios should be cointegrated with the traded‐goods sector’s TFP. Evidence from an intersectoral database for 14 OECD countries broadly supports this implication of the model. In addition to shedding light on the evolution of sectoral capital–labor ratios, the results also alleviate concerns regarding the reliability of capital stock data.