Purchasing Power Parity and Productivity with Balassa - Samuelson Approach in Selected Countires

The Relationship between productivity of economic sectors, effective real exchange rate, and purchasing power is a burning economic issue. Based on the “Balassa – Samuelson” theory, higher economic productivity for tradeable goods leads to an increase in effective real exchange rate which is indicative of higher value of domestic money and higher purchasing power of money. The purpose of this study is to examine the Relationship between the difference of productivity and inflation in commercial partners of Iran and its effect on effective real exchange rate by incorporating the purchasing power parity for 1980-2011. For analysing this relationship we use “Pedroni Cointegration” method and of FMOLS. The results show the effect of “Balassa – Samuelson” in these countries in a way that an increase in productivity of tradable goods leads to an increase in effective exchange rate. Besides, the results show a negative effect of a decreased real exchange rate on purchasing power of Iran for future years.