The Balassa-Samuelson effect provides a structural explanation for PPP deviations. It predicts that:

Mechanism: Productivity growth in tradeables raises wages in that sector. Since labour is mobile domestically, wages also rise in non-tradeables — without a corresponding productivity increase. Non-tradeable prices therefore rise. Richer, more productive countries have higher overall price levels than PPP predicts — their real exchange rate appears appreciated. This explains why PPP deviations are systematically related to income levels (Penn effect), not random noise. Richer countries consistently appear “more expensive” in international comparisons.