Reconsidering The Price–Income Relationship Across Countries

This study reconsiders the well‐known cross‐country positive association between prices and income by focusing on heterogeneity between the inter‐developed‐country and inter‐developing‐country relationships. Empirical results suggest that developed and developing countries exhibit the positive price–income association for different reasons. Specifically, we find only for the inter‐developed‐country case that the positive price–income association is attributable, at least partly, to the Balassa–Samuelson productivity differential effect. The idiosyncrasy of the inter‐developing‐country relationship is not dissolved by controlling for the effects of a variety of real and financial variables. The findings cast some doubt on the conventional explanation for the cross‐country price–income relationship.