Author information:
Veronika Tengely: Magyar Nemzeti Bank, Economist. E-mail: tengelyv@mnb.hu
Abstract:
It is a generally observed phenomenon that there is a positive relationship between the level of economic development and the general price level. According to the Balassa–Samuelson effect, the convergence observed in the price level is largely achieved through higher services inflation. Based on the update of our previous regression estimation results on the effect, the textbook Balassa–Samuelson effect can be detected less and less in the case of Hungary. Moreover, the phenomenon also shows a similar shift in the case of a wider group of countries. The structural transformation taking place in the world economy nowadays, globalisation and the infocommunication revolution are fundamentally transforming the role, tradability and productivity of services, which also influences the fulfilment of the assumptions of the theory. These factors – in particular with regard to market services – have been assessed in terms of several aspects: based on growth patterns, the role of the services sector in the growth path of modern economies is becoming increasingly important, which is proved by both international and domestic data. Current megatrends – such as globalisation, digitalisation, technological development and artificial intelligence – are accelerating the rising productivity of services and leading to changes in consumer habits and the globalisation of services. New structural shifts affecting the services sector are also transforming the conditions associated with the theory, thus weakening the practical operability of the Balassa–Samuelson effect.
Cite as (APA):
Tengely, V. (2020). In Search of the Lost Balassa-Samuelson Effect – The Changing Role of Services in the 21st Century. Financial and Economic Review, 19(2), 5–27. https://doi.org/10.33893/FER.19.2.527
Column:
Study
Journal of Economic Literature (JEL) codes:
E31, F15, F18, F43, F63, O10, O30
Keywords:
services, inflation, Balassa–Samuelson effect, growth, megatrends, productivity
References:
Balassa, B. (1964): The Purchasing-Power Parity Doctrine: A Reappraisal. Journal of Political Economy, 72(6): 584–596. https://doi.org/10.1086/258965
Bauer, P. (2015): Factors of price convergence and its estimated level in Hungary. MNB Studies 119, Magyar Nemzeti Bank.
Cassel, G. (1916): The Present Situation of the Foreign Exchanges. The Economic Journal, 26(101): 62–65. https://doi.org/10.2307/2222038
Darvas, Zs. – Szapáry, Gy. (2008): Euro area enlargement and euro adoption strategies. European Economy, Economic Papers 304, February.
Del Hoyo, J.L.D. – Dorrucci, E. – Heinz, F.F. – Muzikarova, S. (2017): Real convergence in the euro area: a long-term perspective. ECB Occasional Paper Series, No. 203, December, European Central Bank.
Égert, B. (2007): Real Convergence, Price Level Convergence and Inflation Differentials in Europe. Oesterreichische Nationalbank Working Paper No. 138.
Égert, B. (2010): Catching-up and Inflation in Europe: Balassa-Samuelson, Engel’s Law and Other Culprits. OECD Economics Department Working Papers No. 792, OECD Publishing. https://doi.org/10.1787/5kmblscvdk7d-en
Égert, B. – Halpern, L. – MacDonald, R.R. (2006): Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues. Journal of Economic Surveys, 20(2): 257–324. https://dx.doi.org/10.1111/j.0950-0804.2006.00281.x
Frensch, R. – Schmillen, A. (2011): Can we identify Balassa-Samuelson effects with measures of product variety? Economic Systems, 35(1): 98–108. https://doi.org/10.1016/j.ecosys.2010.11.003
Gabardo, F.A. – Pereima, J B. – Einloft, P. (2017): The incorporation of structural change into growth theory: A historical appraisal. EconomiA, 18(3): 392–410. https://doi.org/10.1016/j.econ.2017.05.003
Herrendorf, B. – Rogerson, R. – Valentinyi, Á. (2013): Growth and Structural Transformation. NBER Working Paper, Series, No. 18996. https://doi.org/10.3386/w18996
Heuser, C. – Mattoo, A. (2017): Services and Global Value Chains. World Bank Group, WPS 8126. https://doi.org/10.1596/1813-9450-8126
Kravis, I.B. – Heston, A.W. – Summers, R. (1978): Real GDP Per Capita for More Than One Hundred Countries. The Economic Journal, 88(350): 215–242. https://doi.org/10.2307/2232127
Kuznets, S. (1966): Modern Economic Growth: Rate, Structure, and Spread. New Haven.
Lanz, R. – Maurer, A. (2015): Services and global value chains: Some evidence on servicification of manufacturing and services networks. WTO Staff Working Paper, No. ERSD-2015-03, World Trade Organization.
McKinsey (2013): Globalization in transition: The future of trade and value chains. McKinsey Global Institute, January.
Mihaljek, D. – Klau, M. (2008): Catching-up and inflation in transition economies: the Balassa-Samuelson effect revisited. BIS Working Papers No. 270. https://doi.org/10.2139/ssrn.1334135
Miroudot, S. – Cadestin, C. (2017): Services in Global Value Chains: From Inputs to Value-Creating Activities. OECD Trade Policy Papers No. 197.
MNB (2017): Growth Report, 2017. Magyar Nemzeti Bank.
Obstfeld, M. – Rogoff, K. (1997): Foundations of International Macroeconomics. Cambridge, Massachusetts: The MIT Press.
Rogoff, K. (1996): The Purchasing Power Parity Puzzle. Journal of Economic Literature, 34(2): 647–668.
Samuelson, P.A. (1964): Theoretical Notes on Trade Problems. The Review of Economics and Statistics, 46(2): 145–154. https://doi.org/10.2307/1928178
Világi, B. (2005): Dual inflation and the real exchange rate in new open economy macroeconomics. In: Frankel, J.A – Pissarides, C.A.: NBER International Seminar on Macroeconomics 2005. Cambridge, Massachusetts: The MIT Press.