b) Use the Balassa-Samuelson model to explain why the purchasing power parity may not hold in the presence of nontraded goods. How is the relative productivity of tradeable goods of nations related to the real exchange rate? Carefully explain the intuitions using the Balassa-Samuelson model.

b) Use the Balassa-Samuelson model to explain why the purchasing power parity may not hold in the presence of nontraded goods. How is the relative productivity of tradeable goods of nations related to the real exchange rate? Carefully explain the intuitions using the Balassa-Samuelson model.

Principles of Economics (MindTap Course List)

8th Edition

ISBN:9781305585126

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter31: Open-Economy Macroeconomics: Basic Concepts

Section31.2: The Price For International transaction: Real And Nominal Exchange Rate

Problem 2QQ

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b) Use the Balassa-Samuelson model to explain why the purchasing power parity may not
hold in the presence of nontraded goods. How is the relative productivity of tradeable
goods of nations related to the real exchange rate? Carefully explain the intuitions using
the Balassa-Samuelson model.

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