Together with the absence of significant demand pressures, which kept the inflation of nontradables
at relatively stable levels, this led to a reduction in inflation.
Wolf, "International Evidence on Tradables and Nontradables
Inflation" NBER Working Paper No.
At one level, large current account imbalances may affect domestic macroeconomic variables and asset prices by funding higher levels of domestic spending, especially on nontradables
One might have expected the GDP deflator, which reflects both the price of tradables and the price of nontradables
, to decline more than the export price deflator.
In the case of the euro imbalances, a similar shift towards unsustainable nontradables
activity (housing and government spending) took place in the southern countries as competitiveness diverged by one-quarter to one-third after establishment of a single currency and the asymmetrical shock of labor market reforms in Germany.
In an economy in full-employment equilibrium, a permanent in crease in the inflow of external funds results in a change in relative prices in favor of nontraded goods (services and construction) and against non-oil traded goods (manufacturing and agriculture), leading to the crowding out of non-oil tradables by nontradables
By definition, an increase in the price of nontradables
relative to the price of tradables translates into real exchange rate appreciation.
Water and electricity are usually considered nontradables
Services that used to be nontradables
are now routinely bought and sold in the global marketplace.
First, the sub-CPI items like tradables and nontradables
are not practical to compute.
Balassa (1964) and Samuelson (1964) argued that because technological progress tends to be concentrated in the production of internationally tradable goods, economies that experience sustained rapid technological progress, such as many emerging-market economies, should exhibit a long-term rising real exchange rate in terms of price indexes, such as consumer price indexes, that include nontradables
House prices as such are asset prices, but we can transform to the required flow price basis by using the product of the mortgage rate and the asset price as a primary proxy for the implied price of housing services, and as a secondary proxy for the price of nontradables
in the economy.