The Theory of International Prices: A Classical Production-Based Approach

Siqueira Machado, Pedro (2022). The Theory of International Prices: A Classical Production-Based Approach. PhD thesis The Open University.


This thesis is an investigation into the theory of international prices, following a classical production-based approach. The thesis provides a systematic investigation of different closures to the system of international prices, focusing on the types of assumptions employed by the literature. Three main closures are considered: balanced trade, equal growth rates, and free international mobility of capital. Each of these closures is associated with one or more contributions in the history of thought. Through careful evaluation, the thesis identifies theoretical and empirical shortcomings with each closure.

The thesis then proposes a novel closure to the system of international prices based on given wage disparities. This is done in three successive stages through a step-by-step layering process where each layer adds more realistic and complex scenarios. The first layer builds from a pure labour model; it provides the first formalization of Pasinetti’s contributions to international trade theory. The second layer introduces trade in intermediate goods. The third layer introduces positive rates of profit. For each layer, the thesis analyses the conditions required for countries to specialize according to comparative or absolute advantage. It shows that comparative advantage cannot determine specialization by itself; it needs additional assumptions. Furthermore, the thesis argues that given wage disparities are sufficient to determine absolute cost advantages. International prices and specialization are determined based on absolute cost advantages, compatible with the classical process of price competition.

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