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The Relative Price of Non-traded Goods under Imperfect Competition


  • We thank the editor, Jonathan Temple, two anonymous referees and Ron Smith for constructive comments and advice that have substantially improved the paper. We also acknowledge helpful comments from the participants at the Royal Economic Society Conference 2007 and seminar participants from the University of Kent, University of East Anglia and City University. The second author thanks the Galician government for financial support under grant INCITE09201042PR and under research grant MTM2008-03010.


We consider the role of imperfect competition in explaining the relative price of non-traded to traded goods within the Balassa–Samuelson framework. Under imperfect competition in these two sectors, relative prices depend on both productivity and mark-up differentials. We test this hypothesis using a panel of sectors for 12 OECD countries. The empirical evidence suggests that relative price movements are well explained by productivity and mark-up differentials.