The main purpose of this thesis is to explore whether the Balassa-Samuelson hypothesis can effectively explain the long-term change of the real exchange. The recent panel unit root, panel cointegration tests and fully modified OLS are applied to examine the four tested equations that are based on the Balassa-Samuelson hypothesis. 1. Relative differential productivity between traded and non-traded sectors influences price differential in two sectors. 2. We extend the relative productivity in non-traded and traded sectors causing change in non-traded relative price into the two-country model. 3. The appreciation (depreciation) of the real exchange results from the different relative price of the two-country model. 4. The appreciation (depreciation) of the real exchange is caused by the different relative productivity of the two-country model. The data span is from 1971 to 1995, and includes 12 OECD countries. There are three main different points from the existing literatures. 1. We apply some newly developed panel unit root tests to estimate the equations based on Balassa-Samuelson hypothesis. 2. The previous documents only estimated the model of one variable, but the estimation of two variables was rare. In the equation 14 and 15, we examined the two variables in both. 3. In the calculation of the price, owing to the difficulties of collecting data from various sectors, we use a special way to measure the price. Finally, we can observe from the results of the empirical study: when productivity of the domestic sectors differentiates, that is, 1% increase in relative productivity between traded and non-trade sectors causes 0.53% increase in domestic relative prices. When it is taken into the two-country model, the increase of productivity will cause the appreciation of the real exchange rate. This can explain why in the developed countries like the U.S. and Japan, the faster increase in domestic relative productivity causes the appreciation of real exchange rates in the long run.

The main purpose of this thesis is to explore whether the Balassa-Samuelson hypothesis can effectively explain the long-term change of the real exchange. The recent panel unit root, panel cointegration tests and fully modified OLS are applied to examine the four tested equations that are based on the Balassa-Samuelson hypothesis. The data span is from 1985 to 2002, and includes 7 east asian countries. 1. Relative differential productivity between traded and non-traded sectors influences price differential in two sectors. 2. We extend the relative productivity in non-traded and traded sectors causing change in non-traded relative price into the two-country model. 3. The appreciation (depreciation) of the real exchange results from the different relative price of the two-country model. 4. The appreciation (depreciation) of the real exchange is caused by the different relative productivity of the two-country model. Finally, we can observe from the results of the empirical study: when productivity of the domestic sectors differentiates, that is, 1% increase in relative productivity between traded and non-trade sectors causes 0.28% increase in domestic relative prices. When it is taken into the two-country model, the increase of productivity will cause the appreciation of the real exchange rate.