In the context of international economics, the 'Balassa-Samuelson Effect' explains:
A. Why tariffs are always beneficial
B. Why poorer countries always have trade surpluses
C. Why real exchange rates tend to be higher in richer countries
D. Why capital flows only from rich to poor countries
Answer: Option C
Solution (By JKSSB Mock Tests)
The Balassa-Samuelson effect argues that productivity growth in the tradable sector raises wages economy-wide, increasing the relative price of non-tradables and leading to real appreciation in richer countries.
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