Balassa-Samuelson hypothesis depicts that high wage rate in tradable goods sector leads high wage rate in non-tradable goods sector in emerging economy in any country. Consequently, high wage rate leads to high productivity rate which results in high real exchange rate. Purchasing power parity (PPP) states that if and only if, purchasing power of two countries are same then exchange rates between those countries are in equilibrium.

The objective of this study is to analyse the influence of real exchange rate changes on relative price, relative productivity, government share and terms of trade in Bangladesh during 1972-2016 by applying the Johansen long-run test for co integration. Consequently, this paper intends to estimate whether there is any correlation among real exchange rates, relative price, relative productivity, government share and terms of trade of Bangladesh during 1972-2016. Has Balassa-Samuelson hypothesis any effect on purchasing power parity in Bangladesh? This research seeks to evaluate the foresaid questions. Unlike previous studies, the paper applied ADF test, Johansen long-run test for co integration, ECM, CUSUM and CUSUMQ tests to estimate long run relationships. The results of the Johansen long-run test for co integration suggest that there exists a long-run relationship among the said variables.

The rest of the paper is structured as follows. Section 2 describes a brief review of the relevant literature. Section 3 depicts a theoretical model that captures a Balassa-Samuelson model. The econometric estimations for the long run relationship among the variables are set out in Section 4. Section 5 concludes with some concluding remarks.