Price expectations,disequilibrium adjustments,and macroeconomic price stability

This paper examines the possibility of extending the basic theorems of the risk-free, two-sector, two-factor, constant returns to scale model of production to cover situations with price uncertainty. It is shown that the Rybczynski and Stolper-Samuelson theorems may fail to hold for certain cases while the factor price equalization theorem cannot carry over to the stochastic world, provided firms in the uncertainty sector exhibit decreasing absolute risk aversion. The implications of uniform (relative) changes in both factor endowments and in both (expected) commodity prices are also explored.     

AUSTRALIAN COMMODITY EXPORT PASS-THROUGH AND FEEDBACK CAUSALITY FROM COMMODITY PRICES TO THE EXCHANGE RATE

Commodity export pass-through is examined for Australia in an attempt to determine whether Australia is a price-taker in its commodity export trade. This is undertaken for seven categories of Australia's main commodity good exports. We also determine if there is feedback causality from particular world commodity prices back to the exchange rate as is often hypothesised for commodity good intensive exporting countries. It is found that Australian commodity good export pass-through is complete for the goods which are relatively less important in its export trade but is incomplete (although high) for the goods which are most important in its export trade. There is significant feedback causality to the exchange rate from the world price of coal and wheat, two of Australia's most important commodity good exports over the 1980s and early 1990s.     

International risk sharing and commodity prices

Abstract Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk‐sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity‐specific shocks, not country‐specific shocks. Using commodity‐level production data at the national level and world commodity prices, we document significant terms of trade variability and positive responses of nation‐specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non‐existent.     

The law of one price and the modelling of disaggregated trade flows

This paper argues that the application of a differentiated good model to disaggregated commodity trade, and in particular to primary commodity trade, is feasible. Price data for as narrowly defined a commodity as wheat are shown to violate the law of one price. An Armington-type model which allows prices of a commodity to vary by supplier is then applied to world wheat trade. Two issues concerning the Armington model are addressed. First, it is shown that the theoretical implications of the model are plausible in the case of a disaggregated commodity. Second, as an example, 1973–1974 wheat trade flows and prices forecast by an Armington-type model are shown to be consistent with actual trade patterns and prices.     

A general-equilibrium re-appraisal of the Stolper-Samuelson theorem

This paper conducts a general-equilibrium analysis of the Heckscher-Ohlin model in which product price is endogenized. It applies both marginal and infra-marginal comparative-static analyses to examine the co-movement of factor and product prices. It shows that the Stolper-Samuelson theorem's prediction does not always hold, in particular, it does not always hold inside the diversification cone when changes in production parameters lead to changes in prices; or when the general equilibrium jumps from one structure to another. The result of this paper supports the everything-possible theorem and casts doubt on the general applicability of other core trade theorems derived from the same framework as the Stolper-Samuelson theorem.     

Relative importance of sectoral and aggregate sources of price changes

This paper estimates a dynamic common factor model to assess relative importance of the aggregate and the sector-specific factors that determine changes in the prices of individual products. It also examines how aggregate price changes are affected by these factors. Two different specifications of the model are estimated: the baseline model with one aggregate factor, and a second specification with two aggregate factors. In the one-actor model, the aggregate factor contributes little to the movements of changes in prices, mostly of nondurable goods whereas it seems to have important contributions to the movements of changes in prices of commodity groups mainly used as intermediate or capital goods. In the specification with two aggregate factors, the additional factor has significant effects on changes in prices of ‘farm products’ and ‘processed foods and feeds’ only. Forecast-error variance decompositions of both aggregate and disaggregate price changes suggest that sectoral factors account for most of the variability at short horizons while the contributions of the aggregate factors increase as the time horizon lengthens. The results also show that sectoral factors are not only important for relative price changes but also have significant impact on aggregate inflation. The estimated common factors have statistically significant correlations with money growth and changes in the unemployment rate.     

Direct Investment Liberalization,Commodity Trade and Income Distribution: What Can the WTO do?

This paper analyzes a model of two-way movement of physical capital, and examines the effects of direct investment liberalization on resource allocation, income distribution and commodity trade. If either country or both countries liberalizes investment under exogenously given commodity prices, some factor owners in a country will gain but some others will lose. If capital movement affects commodity prices, all factor owners in a country may be better off after multilateral investment liberalization. In these cases, it will be much easier for the home country to sign an agreement liberalizing investment flows.     

South African trade policy mattersTrade performance and trade policy*

South African trade policy has exerted a major influence on the composition and aggregate growth of trade. In the Apartheid period, South Africa developed a comparative advantage in capital‐intensive primary and manufactured commodities partly because of its natural resource endowments, but also because the pattern of protection was particularly detrimental to exports of non‐commodity manufactured goods. By contrast, trade liberalization from 1990 not only increased imports, but by reducing both input costs and the relative profitability of domestic sales also boosted exports. This evidence suggests that additional trade liberalization and policies that afford South African firms access to inputs at world prices could well be part of the strategy to enhance export diversification.     

On the Contemporary Commodity Structure of World Trade Patterns: An Empirical Assessment

For about 150 years, international trade theory has mostly highlighted trade in consumption goods. Such a modeling approach was likely supported by the then prevailing commodity structure of world trade. This paper shows that – at least since 1970 – only about 20 per cent of commodity trade has taken place in consumables, the remainder being intermediates and capital goods. Theoretically, this evidence suggests a move in the modelling strategy for traded goods: from utility functions to production functions. Sanyal and Jones' "new trade theory" (1982) does precisely that. In addition, some crucial research challenges emerge. These relate to dynamic changes in some general characteristics of production technologies throughout the world.     

Share Ribs and Income Distribution*

The connection between changes in commodity prices and the distribution of income is a question of active interest since the 1941 Stolper-Samuelson Theorem. In higher dimensions results are obtained only if structure is imposed. Here we assume that each of n-industries is alike in the shape of the profile (rib) of distributive factor shares with a permutation of factor numbering such that industry n is most intensive in factor n. Such a structure reveals either a strong version of the Stolper Samuelson Theorem or a Neighborhood oscillation pattern depending on the shape of the share ribs.     

Relative prices and real factor rewards: A reinterpretation

Two devices are generally available to increase the reward of a productive factor: (i) a direct subsidy to the factor, and (ii) an alteration in relative commodity prices. The Stolper-Samuelson result, whereby method (ii) suffices to improve the real reward of a productive factor in a 2×2 setting with no joint production is shown to be valid in the n-commodity, n-factor model.     

The aggregate elasticity of factor substitution with middle products

The elasticity of substitution between factors in production relates the change in the ratio of factors used in a production process to a given change in the factor price ratio. An aggregate concept of such an elasticity relates a change in overall factor endowments to the resulting change in factor prices. For a closed economy the behavior of consumers is an important part of such an aggregate elasticity, since endowment changes can bring about changes in commodity prices and resulting adjustments to factor prices. For a small open economy, commodity prices in typical models are exogenous. In the model with middle products, all final consumer goods are non-traded, so that local consumer behavior can affect factor prices. The aggregate elasticity of substitution is shown to be an average of production elasticities and demand elasticity even for a small open economy.     

International Capital Mobility and Free Trade Once Again*

Using a Heckscher–Ohlin model, this paper re‐examines Robert Mundell's famous thesis that free trade and unimpeded capital mobility are perfect substitutes. Under very general conditions which, according to many economists, have caused international convergence of factor rewards, we show that in a polluted environment free trade is inferior to free international investment. This happens even though commodity prices and factor rewards are the same with both policies. The practical side of our thesis is that the world will be better off by reducing the volume of trade while removing all barriers to foreign direct investment that at present hamper the service industries.     

Real exchange rates,asset prices and terms of trade: A theoretical analysis

This paper develops a continuous-time two-country dynamic equilibrium model, in which the real exchange rates, asset prices, and terms of trade are jointly determined in the presence of nontradable goods. The model determines the relation between the financial markets and real goods markets in the world economy and their responses to various shocks under the home bias assumption. A positive domestic supply shock induces a positive return on the domestic asset markets and a deterioration of terms of trade that improves the foreign output and boosts the foreign asset markets. Demand shocks act in the opposite way. This model also analyses the impact of change in the relative price of nontradable to tradable goods on the terms of trade and asset markets. A higher productivity growth in tradable goods than in nontradable goods leads to a higher relative price of nontradable to tradable goods, which appreciates the real exchange rate, deteriorates the terms of trade, and depresses the domestic and foreign asset markets. A lower relative price of nontradable goods depreciates the real exchange rate, improves the terms of trade, and lifts both the domestic and foreign asset markets.     

Taxes on capital in a specific factor model with international capital mobility

The efficiency and distributional effects of sundry capital taxes are analyzed in a simple two-sector specific factor model where capital is mobile both between the two sectors and between the home country and the rest of the world. Two cases are discussed: the small country case where factor and commodity prices are parametric; and the large country case. The optimal tax on capital export is illustrated when commodity prices are parametric. A simple approach to the case when both factor and commodity prices are variable is demonstrated.     

Home bias, distribution services and determinants of real exchange rates

This paper examines empirically how exogenous changes in the terms of trade affect the real exchange rate through the relative price of traded goods with Canada–US data. The relative price of traded goods is constructed using prices at the dock and retail prices. The first measure emphasizes the importance of home bias in consumption of traded goods. The second measure highlights the importance of distribution services required for consumption of traded goods. It is found that terms of trade shocks affect the relative price of traded goods using both measures. A possible interpretation of empirical findings is that home bias and distribution services are important for understanding the relative price of traded goods.     

Factor Substitution and Relative Factor Prices

This paper examines the effects of factor endowments on factor prices in a three‐factor, two‐commodity general‐equilibrium model with endogenous commodity demand and prices. Unlike the conventional small open‐economy model that assumes constant commodity prices, factor substitution influences the direction of these effects. When a factor endowment increases, complementarity with the expanding factor benefits an unchanged factor, but substitutability harms it. If the unchanged factors are complements, there is a possibility of a rise in the expanding factor's price. A comparison of this closed‐economy model with the small open‐economy model reveals the role of international trade, which dampens the effect on the expanding factor's price.     

Domestic Trade and Transport Costs in International Trade Theory

This paper examines the effects that domestic trade and transport margins have on international trade and the consequences for the central trade theorems. Specifically, the Heckscher-Ohlin-Samuelson model is expanded to include a third industry that produces the nontraded domestic services in transportation, warehousing, wholesaling and retailing required to market goods to final purchasers. It is found that the domestic margins probably impose substantial natural trade barriers and that they can cause the central trade theorems (factor-price equalization, Stolper-Samuelson, and Rybczynski) to fail. [F11]     

Factor-Price Equalization By Trade In Joint and Non-Joint Production

Sans joint products, relative factor prices do determine relative goods prices. Free trade in goods thus can hope to equalize factor returns when this relationship is monotone and therefore uniquely reversible. However, when joint production obtains, often the same relative factor prices can entail an infinity of relative goods prices depending upon the composition of tastes and demand. In consequence, trade's equalization of goods prices is compatible with factor-returns inequality. Generic and singular relationships are described.