National Price Levels and the Prices of Tradables and Nontradables

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This paper examines changes in national price levels and prices of tradables and nontradables and relates them to changes in variables found earlier to be associated with price level differences among countries. Across countries, national price levels increase systematically with the level of a country's per capita income, and the ratios of tradables to nontradables prices decrease. Over time, increases in per capita income are generally associated with increases in price levels in the industrial countries, although the opposite relationship tended to prevail among developing countries. Increases in income are associated with declines in the ratio of tradables to nontradables price levels more consistently than with the increases in general price levels. Increases in the exchange value of a currency are also associated with declines in the price levels for tradablesrelative to nontradables. Countries with price levels that were high or low relative to those predicted by the structural equations tended to move toward those predicted levels.

Published: The American Economic Review, Vol. 78, No. 2, pp. 474-478, (May 1988).

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