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CEP discussion paper
The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited
Fadi Hassan
June 2011
Paper No' CEPDP1056:
Full Paper (pdf)

JEL Classification: E31; F4; O1

Tags: balassa-samuelson; penn effect; developing countries; non-parametric estimation; purchasing power parity; real exchange rate

It is conventional wisdom that richer countries have a higher price level than poorer countries. This paper provides evidence that the price-income relationship is non-linear and that it turns negative, or at best flat, in low income countries. The result is robust along both cross-section and time-series dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result.