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      Question

      _____________________Effect is an effect that describes

      the relationship between an increase in productivity, higher exchange rates and an increase in wage growth. This effect shows that when there is an increased level of productivity in the tradable goods sector of a country, there tends to be a higher exchange rate, consumer prices are also likely to be higher
      A Stolper Samuelson Effect Correct Answer Incorrect Answer
      B Balassa-Samuelson Effect Correct Answer Incorrect Answer
      C Leontiff Effect Correct Answer Incorrect Answer
      D Factor-Intensity Reversal Effect Correct Answer Incorrect Answer

      Solution

      The Balassa-Samuelson effect states that productivity differences between the production of tradable goods in different countries explain large observed differences in wages and in the price of services and between purchasing power parity and currency exchange rates. It suggests that an increase in wages in the tradable goods sector of an emerging economy will also lead to higher wages in the non-tradable (service) sector of the economy. The accompanying increase in prices makes inflation rates  higher in faster-growing economies than it is in slow-growing, developed economies .

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