1. A well-established stylized fact is that the price level is lower in poor countries relative to advanced economies. Balassa-Samuelson advance the hypothesis that this is due to the fact that the relative productivity of tradables to non-tradables is much higher in advanced economies than in poor nations. Use the basic Balassa-Samuelson formula,? =????????? ??? ????to interpret the graph below. Notice that it refers to changes in????relative productivity and changes in the relative price of nontradables. How big do you think is the share of non-tradables (?) that results from this plot?

Relative productivity and non-traded relative price Average annual percent change in relative price of nontradables A higher traded-nontraded 4.0 productivity growth differ- 3.5 ence is associated with a . Japan higher rate of increase in 3.0 the relative price of non- Belgium 2.5 tradables. France 2.0 Netherlands Austria . Italy 1.5 Germany . USA . UK Norway . 1.0 . . Finland Sweden . Denmark .5 0 . Canada -0.5 + 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Difference between traded and nontraded average annual percent change in total factor productivity