Dosanomics explained

So, this write-up is regarding Dr.Raghuram Rajan’s speech in 2016 at a Federal Bank event. So an engineering student asked that he mentioned about inflation control but in reality, let’s say,if we consider the example of Dosas. When inflation goes up, the price of Dosas also go up but when inflation goes down, the price of Dosa doesn’t get any lower. So why does this happen. So this was a valid question to which Dr. Rajan answered as follows. He mentioned about the role of technological improvements affecting the prices of products. So in areas where technological improvement has taken place the prices can be lowered but in areas like Dosa-making, that’s not the case. This is known as the Balassa-Samuelson effect.The person who makes the Dosas still puts the batter, spreads it around and takes it out. There is no technological change, while the rising wages do affect the prices of Dosas. To retain the workers who can migrate to sectors with improved productivity due to technology and with high wages, the wages of Dosa-makers get affected. Thus, the prices of Dosas don’t come down in times of low inflation.

So this was an interesting answer by Dr. Rajan to an interesting question