The idea of this contribution has come after
the publication in The Economist The Big Mac
index. Such index was
introduce to explain the concept of real currency exchange rate needed
to deal with the problem of varying price levels in different countries.
The different price levels cause the different purchasing powers of the
same currency around the world. For example, the network of fast food
restaurants around the world McDonald’s serves everywhere the same
products, consider one of them - Big Mac. Having in mind the same
quality of the product we do observe different prices of Big Mac around
the world and so have to accept the varying prices or purchasing powers
of the same currency, say USD. It was thought from the beginning that
such effect must be temporal and exchange rates have to converge towards
equilibrium where Big Mac prices equalize. Unfortunately, this do not
happen, the different price levels around the world is very stable
phenomena and statistically prices are higher in countries with higher
incomes. This statistical phenomenon was called Penn effect and
economists Balassa and Samuelson in 1964 independently explained it as a
result of different productivities in tradable and not tradable sectors
of the economy. The research in contemporary international
macroeconomics forces us to acknowledge that this phenomenon is much
more general and Balassa Samuelson effect is only one of all possible
explanations.