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Relative to consumer services, consumer goods tend to be cheaper in richer European countries. This tendency, customarily explained in terms of cost developments and/or foreign-trade considerations, can be a reflection of a demand-side regularity. An econometrically specified cross-country demand system indicates that goods are 'necessities' while services are 'luxuries'. Relative price of goods responds negatively to the rising supply of goods and positively to the rising supply of services, with the former response being much stronger. If the supply of both items were to rise at the same speed, the relative price of goods would have to fall.
wiiw Working Papers
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Why Are Goods Cheaper in Rich Countries? Beyond the Balassa-Samuelson Effect (by Leon Podkaminer) wiiw Working Paper No. 64, April 2010 20 pages including 2 Tables and 6 Figures FREE DOWNLOAD
Keywords: relative prices, Balassa-Samuelson Effect, Engel Law, Almost Ideal Demand System, international consumption comparisons, structural change JEL classification: O14, D12, D51 Countries covered: European Union Topics: Macroeconomic Analysis and Policy, Sectoral studies |
Add to cartRelative to consumer services, consumer goods tend to be cheaper in richer European countries. This tendency, customarily explained in terms of cost developments and/or foreign-trade considerations, can be a reflection of a demand-side regularity. An econometrically specified cross-country demand system indicates that goods are 'necessities' while services are 'luxuries'. Relative price of goods responds negatively to the rising supply of goods and positively to the rising supply of services, with the former response being much stronger. If the supply of both items were to rise at the same speed, the relative price of goods would have to fall.
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