Does the Balassa-Samuelson Effect Raise the Relative Price of Services in India? Industry-Services Productivity Gaps, an Exact Relative-Price Identity, and 166 Economies, 1991-2023
Year: 2026
Type: preprint
Abstract: The Balassa-Samuelson hypothesis says that when tradable (here industry) productivity grows faster than non-tradable (services) productivity, the relative price of services rises. I measure the relative price as the ratio of the services to industry value-added deflators from World Bank WDI current and constant series, which satisfies the exact identity that the log change in the relative price equals the difference of log deflator changes. For India, 1961-2025 (65 years), the slope of the annual log relative-price change on the industry-minus-services real growth gap is 0.135 (Newey-West standard error 0.111), and from 1991 to 2023 the relative price barely moved (1.045 to 1.031) even though industry lagged services by 0.278 log points cumulatively. Across 166 economies with at least 15 years of data, a long-difference regression of the cumulative log relative-price change on the cumulative industry-services productivity gap has slope 0.431 (HC1 standard error 0.077, R-squared 0.224). The median cumulative log relative-price change is only 0.040. India sits near the centre: services grew faster than industry, yet the relative price of services did not rise as the textbook Balassa-Samuelson mechanism would predict for a catching-up economy.
Author: Aguru, Manoj Kumar
Institution: Chaitanya
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7225462121