Deviations from purchasing power parity can be explained by the Balassa-Samuelson model, which assumes:
A) government regulation is absent.
B) traded goods have the same prices, productivity in traded goods determines wages, and wages determine prices of nontraded goods.
C) worker productivity is rising, returns to capital equal the real rate of interest, and there is no money illusion.
D) competitive markets, full information, and full employment of resources.

Question

Quizplus · Accepted Answer

The Balassa-Samuelson model assumes that traded goods have the same prices, productivity in traded goods determines wages, and wages determine prices of nontraded goods. This helps to explain deviations from purchasing power parity.

Deviations from Purchasing Power Parity Can Be Explained by the Balassa-Samuelson