Labor Productivity Parity vs Trend of Exchange Rate


Translation, understood as a process of restating the value from a particular currency to another currency, is based on the market exchange rate. So in practice, almost every value in terms of goods, assets, liabilities, and wages is converted to US dollars according to the current exchange rate. A fundamental method of translation was originated by Balassa and Samuelson in 1964 who explained that the main driver of the exchange rate is productivity, which is higher in developed countries and lower in poor countries. That is why these differences must be eliminated in order to make the exchange rate useful. However, different research verifying the Balassa-Samuelson approach, especially in the long run, had revealed some inconsistencies. Recently the Balassa-Samuelson theory has been enriched by more precise determination of productivity; specifically, an appropriate ratio for the translation procedure has appeared labor productivity Q defined as quotient of real GDP to cost of labor. The main aim of the paper is to present statistical verification of labor productivity parity as the main driver of the exchange rate. In the research, there will be an estimation of parameters of linear function in which the dependent variable represents the average exchange rate for the period between a particular country and the USA, and the independent variable is the average hourly pay quotient modified by labor productivity parity. If the linear function parameters describe the y = x relation, the theory of labor productivity as the determinant of exchange rate behavior will be confirmed.

Share and Cite:

M. Jedrzejczyk, "Labor Productivity Parity vs Trend of Exchange Rate," Modern Economy, Vol. 3 No. 6, 2012, pp. 780-785. doi: 10.4236/me.2012.36099.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] M. Jedrzejczyk, “Value Translation in Consolidated Financial Statements of the International Capital Groups,” Polskie Towarzystwo Ekonomiczne, Cracow, 2009.
[2] M. Jedrzejczyk, “Towards the Best Procedure of Translation” In: I. Górowski, Ed., General Accounting Theory, Evolution and Design for Efficiency, Wydawnictwa Akademickie i Profesjonalne, Warsaw, 2008
[3] M. Pakko and P. Pollard, “For Here or To Go? Purchasing Power Parity and the Big Mac,” Review of the Federal Reserve Bank of Saint Louis, Vol. 78, No. 1, 1996, pp. 3-21.
[4] Financial Accounting Standards Board, “Original Pronouncements 1998/1999 Edition,” John Wiley and Sons, Hoboken, 1998.
[5] W. G. Ko?odko, “About Fixing Our Finance,” TNOiK, Toruń, 2004.
[6] K. Pilbeam, “International Finance,” 3rd Edition, MacMillan Business, London, 2006
[7] K. Kasa, “Understanding Trends in Foreign Exchange Rates,” FRBSF Weekly Letter, Vol. 95, No. 22, 1995.
[8] B. Balassa, “The Purchasing Power Party Doctrine: A Reappraisal,” Journal of Political Economy, Vol. 72, No. 6, 1964, pp. 584-596.
[9] P. Samuelson, “Theoretical Notes on Trade Problems,” Review of Economics and Statistics, Vol. 46, No. 2, 1964, pp. 145-154.
[10] M. Dobija, “Labor Productivity vs Minimum Wage Level,” Modern Economy, Vol. 2, No. 5, 2011, pp. 780-787. doi:10.4236/me.2011.25086
[11] M. Dobija, “Abstract Nature of Money and the Modern Equation of Exchange,” Modern Economy, Vol. 2, No. 2, 2011, pp. 142-152. doi:10.4236/me.2011.22019
[12] M. Dobija and M. J?drzejczyk, “Conversion of Values to One Money Unit in Consolidation Process,” Emergo: Journal of Transforming Economies and Societies, Vol. 11, No. 4, 2004.

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.