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Balassa-Samuelson effect

The Balassa-Samuelson effect can help to explains why a restaurant meal is much cheaper in poor countries than in rich countries whereas the price for a car or a television is almost the same everywhere.

International competition across borders tends to equalise the price of highly tradable goods like TV screens or mobile phones across countries whereas the price of non-traded goods such as haircuts and meals out is less exposed to this effect.

Another reason is that the variation in productivity across countries is more significant in tradable goods than in non-tradable goods. Farmers in lower income countries need more labour inputs than their counterparts in advanced countries because of of big differences in productivity.

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