219:(CPI) show the same pattern; equivalent things tend to cost more in high income countries. Most services, perishable goods like the Big Mac, and housing cannot be purchased very far from the point of consumption (where the consumer happens to live). These items form the typical consumer shopping list, and therefore the consumer price level can vary from country to country, just like the burger price.
99:, with studies since then consistently confirming the original Penn effect. However, subsequent analysis has provided many other mechanisms through which the Penn effect can arise, and historical cases where it is expected, but not found. Up until 1994 the PPP-deviation tended to be known as the "Balassa-Samuelson effect", but in his review of progress "Facets of Balassa-Samuelson Thirty Years Later"
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level in the rich world. If the money income levels are taken as given, then all else being equal, the Penn effect is beneficial. If it did not apply, millions of the world's poorest people would find that their income was below the survival threshold. However, the effect implies that the money
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model treating Big Macs as commodity goods implies that international price competition will force
Norwegian, Egyptian, and U.S. burger prices to converge in price. The Penn effect, however, maintains that the general price level will remain consistently higher where (dollar) incomes are high.
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study finds that industrialized countries tend to fit Cassel's hypothesis better (at a ratio of 2 countries to 1). This result can occur (despite an apparently clear correlation of income to price) because of the long reversion times expected by the PPP
73:(PPP) hypothesis, also expressed as saying that the real exchange rate (RER) between goods in various countries should be close to one. Fluctuations over time were expected by this theory but were predicted to be small and non-systematic.
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between rich and poor countries is less than GDP per capita figures would suggest, if converted at market exchange rates. To make a more significant comparison, economists divide a country's average income by its consumer price index.
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says that the same item cannot sustain two different sale prices in the same market (since everyone would buy only at the lower price). By reversing this law, we can infer that different countries do not share an
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Classical economics made simple predictions about exchange rates; it was said that a basket of goods would cost roughly the same amount everywhere in the world, when paid for in some common currency (like
377:- A direct 2003 comparison of Cassel's pure PPP-hypothesis and the Penn effect deviation at scales estimated by the BS-hypothesis (using data from sixteen industrialized countries). Surprisingly, this
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burgers the price in Oslo will be unaffected, since one is unlikely to dine in Cairo if starting the evening in Oslo, nor can one import an
Egyptian meal into Norway by ordering take-out.
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restaurant at one quarter the price they would do so, and price competition would then equalize the Big Mac price throughout the world. Of course, someone can only eat out
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However, the "Penn effect", even as
Samuelson used it, refers to the general observation: there is correlation between higher price levels and higher per capita income.
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team documented a modern relationship: countries with higher incomes consistently had higher prices of domestically produced goods (as measured by comparable
354:(their time series starts 1500 AD, with the Penn effect only noticeable 450 years into the data). The appendix contains a thorough (eight page) two country
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If the genuine income differential (taking local prices into account) is exaggerated by the market exchange rate, so the real difference in the
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across a continuum of industries, endogenously split between traded and non-traded production. However, the paper as a whole is focused on
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The
Balassa-Samuelson effect model arises from a project to confirm the result and explicate the cause within the neoclassical framework.
203:, so regional price differentials can persist; the Oslo and Cairo branches are not in competition. If the Cairo McDonald's starts
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income level disparity as measured by international exchange rates is an illusion, because these exchange rates only apply to
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data-gatherers, by coining the term "Penn effect" to describe the "basic fact" they uncovered, when he wrote:
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308:. It was thought that deviations from this would mostly be caused by problems of supply, and the fact that
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G-20 ICP: An analysis of the data in the
International Comparison Program gives clear Penn effect examples
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138:" country will usually find their money going a lot further abroad than at home. For instance, a
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Measuring 'the' price level involves looking at goods other than burgers, but most goods in a
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for those two local currencies, despite the fact the two products are essentially the same.
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For instance, economists in 1949 expected that one could buy similar quantities of meat in
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Most things are cheaper in poor (low income) countries than in rich ones. Someone from a "
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How identical products can be sold at consistently different prices in different places
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is an important phenomenon of actual history, but not an inevitable fact of life.
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hypothesis argues that the
Balassa–Samuelson effect should not occur. A simple
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Paul A. Samuelson (1994). "Facets of
Balassa-Samuelson Thirty Years Later,"
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finding that commodity prices are higher in countries with higher income.
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common market from the fact that prices for the same good are different.
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ratios between high and low income countries are misrepresented by
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In 1964 the modern theoretical interpretation was set down as the
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consistently shows fourfold differentials in the burger's price.
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Long Run
Purchasing Power Parity: Cassel or Balassa-Samuelson?
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2004 Econometric study of the effect's rise since circa 1950
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is the situation in which RERs are 1, a nil Penn effect.
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The effect's challenge to simple open economy models
103:acknowledged the debt that his theory owed to the
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358:derivation of the effect's size based on the
30:This is often interpreted to mean that real
235:to survive on an income below the absolute
92:), when compared at market exchange rates.
223:The international development implications
316:to market levels by most of the world's
42:. It is associated with what became the
150:in January 2013, at the prevailing USD
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320:(before the 1970s and the end of the
244:, a small proportion of consumption.
364:analysis of historical economic data
339:(Abstract defining the Penn effect)
76:Pre-1940, the PPP hypothesis found
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335:Review of International Economics
306:nominal exchange rate at the time
195:were able to eat in an identical
80:support, but some time after the
50:result since at least the 1950s.
16:Observed phenomenon in economics
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46:, and it has been a consistent
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324:era of gold convertibility).
120:Understanding the Penn effect
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134:" country on vacation in a "
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84:, a series of studies by a
38:(GDP) conversion at market
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191:If a McDonald's patron in
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86:University of Pennsylvania
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162:The (naĂŻve form of the)
97:Balassa–Samuelson effect
337:2(3), pp. 201–26.
275:Purchasing Power Parity
229:Purchasing power parity
164:purchasing power parity
71:purchasing power parity
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69:). This is called the
36:gross domestic product
379:University of Houston
124:Further information:
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401:Eponyms in economics
312:were not allowed to
217:consumer price index
356:General equilibrium
249:standard of living
396:Economics effects
227:The deviation in
105:Penn World Tables
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181:law of one price
82:Second World War
44:Penn World Table
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269:Big Mac Index
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382:hypothesis.
237:subsistence
205:giving away
136:third world
132:first world
113:Penn effect
78:econometric
48:econometric
21:Penn effect
390:Categories
328:References
282:Footnotes
186:efficient
300:for 360
292:for one
290:New York
256:See also
25:economic
233:Indians
201:locally
140:Big Mac
60:History
23:is the
296:as in
294:dollar
144:Norway
32:income
314:float
298:Tokyo
197:Cairo
148:Egypt
193:Oslo
179:The
111:The
67:gold
19:The
302:Yen
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267:s
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