Economic Structure, Welfare, and the Real Exchange Rate

By Guido Baldi and Viktorija Sipilova.

Published by The International Journal of Interdisciplinary Social and Community Studies

Format Price
Article: Print $US10.00
Published online: August 26, 2014 $US5.00

Transition or developing countries that are in the process of catching-up usually experience an increase in the productivity of the tradable goods sector. This often entails a subsequent increase in real wages, which may lead to higher wages in the non-trading sectors of the economy. If productivity in these sectors does not sufficiently increase, a country will experience rising inflation rates and an appreciation of their real exchange rate, which is known as the Balassa-Samuelson effect. Such a development can eventually hamper economic growth and welfare in a country and can also lead to a sudden stop and a serious crisis. In this paper, we first present a simple theoretical model inspired by Christopoulos et al. (2010) to highlight how structural changes in the economy that alter the sectoral structure of an economy and its wages and welfare level impact on the real exchange rate. We then provide empirical evidence for the case study Latvia.

Keywords: Balassa-Samuelson Effect, Economic Structure, Welfare, Real Exchange Rate, Latvia

The International Journal of Interdisciplinary Social and Community Studies, Volume 8, Issue 2, October 2014, pp.13-22. Article: Print (Spiral Bound). Published online: August 26, 2014 (Article: Electronic (PDF File; 603.203KB)).

Dr. Guido Baldi

Researcher, Economist, The German Institute for Economic Research, Berlin, Germany

Viktorija Sipilova

Doctoral Student, Researcher, The Institute of Social Research, Daugavpils University, Latvia