The Balassa-Samuelson model says that wages and prices in general are higher in higher-income nations because:
A) they have more effective laws protecting their workers.
B) the workers have a higher productivity level, which is reflected in prices of nontraded goods.
C) there is less competition in these economies.
D) taxes on business and for entitlement programs raise labor and other costs, making prices much higher.

Question

Quizplus · Accepted Answer

The Balassa-Samuelson model asserts that wages and prices in higher-income countries are higher because of the higher productivity levels of their workers, which are reflected in prices of non-traded goods. This is because non-traded goods (such as haircuts, restaurant meals, and housing) cannot be imported, so their prices are entirely determined by local supply and demand. As a result, the higher wages earned by workers in higher-income countries spill over into the prices of non-traded goods, making them more expensive relative to traded goods.

The Balassa-Samuelson Model Says That Wages and Prices in General