Relative Prices and ‘Factor Price’ Equalisation in a Heterogeneous Capital Goods Model

Abstract

In recent years there has been some debate on the consequences for some well-known international trade theorems of the inclusion of heterogeneous capital goods in the process of production.¹ In one contribution Steedman and Metcalfe [12] have shown by means of a simple numerical example that the equalisation by trade of so-called ‘factor prices’, the wage and rate of profits, may not occur in these circumstances. Such a result requires a non-monotonic relationship between relative commodity prices and ‘factor prices’. The purpose of this paper is to examine this relationship in the context of a multi-commodity, multi-technique circulating capital model of the type familiarised by Sraffa [11]. We shall attempt to show that circumstances exist in which ‘factor price’ equalisation (f.p.e. for short) may not be realised, and that such circumstances are not dependent on there being complete international specialisation, nor on reversals of ‘factor’ intensity.

This essay was first published in Australian Economic Papers, 1976. I should like to thank, without implicating in any way, Ian Steedman, J. S. Metcalfe, J. A. Kregel and a referee of A.E.P. for their helpful comments.