The Balassa-Samuelson effect can be used to forecast changes in real exchange rates by considering the speed of ______ and ______.
A) convergence to equilibrium; trend changes in the equilibrium value
B) adjustment to trade imbalances; budget deficit reduction
C) innovation and productivity; the deterioration of the peg
D) adjustment to imbalances in income levels; educational attainment

Question

Quizplus · Accepted Answer

The Balassa-Samuelson effect is based on the idea that differences in productivity levels between countries lead to differences in the prices of traded goods and non-traded goods. As non-traded goods are typically more labor-intensive, productivity gains in the traded goods sector will increase wages, leading to higher prices for non-traded goods. This, in turn, will cause higher inflation in countries with higher productivity levels. As a result, the equilibrium real exchange rate will shift, and the speed of convergence to this new equilibrium and trend changes in the equilibrium value can be used to forecast changes in real exchange rates.

The Balassa-Samuelson Effect Can Be Used to Forecast Changes in Real