Balassa - Samuelson Hypothesis

• suggests that the general price level will be higher in rich countries (because of the higher price of non-tradeable services)
• When we consider the exchange rate among rich/developed countries , PPP exchange rates may serve as useful benchmark but only in the long-run
• PPP exchange rate are not suitable benchmark whole comparing the exchange rate between a developed country and a developing country.
• B-S hypothesis predicts that fast growing developed countries should experience an appreciation of their currency
•  B-S Suggests that the price level will be proportional to per capita income so the correct exchange rate level doesn't need to equalize purchasing power of a given amount of money when converted to the foreign currency