European Comparison Project data (years 1999-2008) are used for an estimation of cross-country systems (AIDS) of consumer demand functions defined over durable and non-durable tradable goods and non-tradable services. General exchange equilibrium models of inter-EU trade generate equalized relative prices of tradable goods. But domestic relative prices of services become more dispersed and can move the PPP/ER ratios away from unity. PPP/ER discrepancies may be sustained even when there are no impediments to free trade.
Purchasing Power Parity exchange rate PPP/ER discrepancy Law of One Price Balassa-Samuelson Effect trade integration computable general equilibrium cross-country systems of demand functions Almost Ideal Demand System tradable goods non-tradable goods