Export of Deindustrialization and Anti-Balassa-Samuelson Effect: The Consequences of Productivity Growth Differential

This paper focuses on productivity growth differentials between manufacturing and services, deindustrialization, and changes in the real exchange rate. Using a Ricardian trade model with a continuum of goods that introduces nontraded services, the paper investigates these interrelationships. The main results are as follows: (i) if deindustrialization proceeds in both home and foreign countries, then the ratio of home manufacturing employment share to foreign manufacturing employment share and the real exchange rate move in the same direction; (ii) even if the productivity growth dierential in the home country is greater than that in the foreign county, the extent of deindustrialization in the home country is not necessarily larger than that in the foreing country. On the contrary, it is possible that the foreign deindustrialization exceeds the home deindustrialization; and (iii) even if the productivity growth dierential in the home country is greater than that in the foreign county, the real exchange rate of the home country can depreciate contrary to the expectaion of the Balassa-Samuelson effect.