As a standard explanation for national price levels, the Balassa-Samuelson (BS) effect presupposes a homogeneous domestic labor force and intersectoral labor mobility. We propose a contrasting theory of the rich neighborhood effect which allows for domestic labor force heterogeneity. The...

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the "Balassa-Samuelson" effect. But looking back fifty years, or more, this effect virtually disappears from the data. What is...