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Nontraded Goods and Real Exchange Rates in a Multi-Good Ricardian Model

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  • Roy J. Ruffin

Abstract

The two-country Ricardian trade model with discrete goods and uniform transport costs for tradable goods is applied to the decomposition of the real exchange rate into traded and nontraded components. The real exchange rate is driven almost entirely by changes in the productivity differentials in nontraded goods and also explains the Balassa–Samuelson effect of a lower cost of living in poor countries, but extraordinary transport costs for some nontraded goods are necessary to easily explain the Balassa–Samuelson effect.

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  • Roy J. Ruffin, 2014. "Nontraded Goods and Real Exchange Rates in a Multi-Good Ricardian Model," Review of International Economics, Wiley Blackwell, vol. 22(1), pages 105-115, February.
    • Handle: RePEc:bla:reviec:v:22:y:2014:i:1:p:105-115
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    References listed on IDEAS

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