This increase in consumption led to an increased demand for tradable
goods and services, as well as non-tradable goods and services.
Consumer Price Index (CPI) follow the tradable-versus-nontradable pattern: tradable
goods and services have lower inflation, and nontradable ones have higher inflation.
Transition economies displaying a ratio between non- tradables
that exceeds the economy's structural flexibility, as given by (18), face problems with the inflation criterion while making progress toward fulfilling the debt criterion.
Clearly, they conclude, "The evidence from OECD countries broadly supports the predictions of the model, namely that faster productivity growth in the tradable
relative to the non-tradable sector and an improvement in the terms of trade induces a real appreciation" [De Gregorio and Wolf (1994), p.1].
(8) A binding credit constraint amplifies the consumption drop in response to negative shocks to tradables
' output, relative to perfect capital markets.
They break the undervaluation-growth relationship into two separate links, one from undervaluation to the size of tradables
(that is, industry) and the other from the size of industry to economic growth.
In order to test whether these results extend to nonmanufactured tradable
goods in the economy, and whether a real exchange rate appreciation has the expansionary effect on nontradable goods production predicted if resources are flowing in from tradables
production, we divide the nonmanufactures components of GNP into three categories: (i) agriculture, mining, forestry and fishing industries; (ii) construction, transportation, and public utility industries; and (iii) services (retail trade, wholesale trade, finance, insurance, real estate, and other service industries).
sector accounted for only a negligible number of new jobs due to gains in service industries (eg, finance and consulting) being offset by losses in manufacturing and agricultural employment.
But starting from an unbalanced combination of tradable
and non-tradable sectors, the interesting turnpike result is that in order to get back to a balanced economy, it pays to reallocate resources between the two sectors sooner rather than later.
However, the bias is generally small in economic terms for both MPS and model-combination forecasts--about one quarter the size of the standard deviation of the historical data for tradable
and headline inflation, GDP growth and interest rate forecasts.
It is true, as Spence claims, that the tradable
sector of the economy has lost many jobs in the past several decades.