The Balassa-Samuelson theorem is a conventional theory of economics that explains the phenomena of productivity and wages across countries. This theory has significant implications for both developed and developing economies since it explains why some nations are more prosperous than others and how wages and prices may change over time. In this article, we will discuss the main advantages of the Balassa-Samuelson theorem and how it may be used to shape economic and business policies.
The first advantage of the Balassa-Samuelson theorem is that it explains why wages are higher in developed countries than in developing countries. According to the theory, wages are determined by productivity, and rich countries have more productive economies because of their technological and infrastructural development. This means that workers in developed countries are more efficient in that they can produce more goods and services in a given period, which in turn means that they have to be paid more.
The other advantage of the Balassa-Samuelson theorem is that it can shed light on the fact that prices are higher in developed countries than in developing countries. The theory states that as productivity rises, so does the price because companies can charge more for their products and services since they are paying their workers more. This results in an increase in the cost of living in developed countries, which makes it challenging for people with low incomes to afford essentials.
The Balassa-Samuelson theorem also has implications for businesses working in different countries. For instance, companies working in countries with higher productivity may be able to sell their products at higher prices because they are paying their workers more. This could put them at a competitive advantage over other companies in countries with low productivity.
Nevertheless, there are some drawbacks of the Balassa-Samuelson theorem. A possible weakness is that it does not include other factors that can affect wages and prices, such as the cost of the input factors, taxes, and government actions. Furthermore, the theorem may not always hold in practice since there are other factors that can affect wages and prices such as supply and demand, competition, and market trends.
Despite the existence of these limitations, the Balassa-Samuelson theorem is still a significant economic theory that can explain the relationship between productivity and wages across countries. Knowing the advantages of this theory, policymakers and business people can make rational decisions on economic and business policies that may lead to economic growth and development.