Reconsidering The Price-Income Relationship Across Countries

This study reconsiders the well-known cross-country positive association between prices and income by focusing on heterogeneity between the inter-developed-country and inter-developing-country relationships. Empirical results suggest that developed and developing countries exhibit the positive price-income association for different reasons. Specifically, we find only for the inter-developed-country case that the positive price-income association is attributable, at least partly, to the Balassa-Samuelson productivity differential effect. The idiosyncrasy of the inter-developing-country relationship is not dissolved by controlling for the effects of a variety of real and financial variables. The findings cast some doubt on the conventional explanation for the cross-country price-income relationship.