On the Long-Run Neutrality of Profits-Wages Ratios in the Determination of International Relative Prices Under Absolute Advantages

Luis Daniel Torres-Gonzalez (torrl352@newschool.edu), Jacobo Ferrer-Hernandez (ferrj728@newschool.edu) and Adrian Martınez
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Luis Daniel Torres-Gonzalez: Facultad de Economıa, Benemerita Universidad Autonoma de Puebla
Jacobo Ferrer-Hernandez: Department of Economics, New School for Social Research
Adrian Martınez: Facultad de Economıa, UNAM

No 2208, Working Papers from New School for Social Research, Department of Economics

Abstract: This paper reconstructs and evaluates the theory of international relative prices (IRP) based on the theory of real competition, one of the approaches to international trade based on the principle of absolute advantages. The main thesis of this theory is that the long-run behavior of IRP of any pair of tradable commodity bundles is determined solely by their relative total unit labor costs (RTULC) because the total profits-wages ratios (TPWR) of these two baskets are sufficiently similar. We identified a set of problems that questions the long-run neutrality of the TPWR on IRP. Firstly, due to accounting reasons, the proposed hypotheses cannot constrain IRP to depend solely on the RTULC. Secondly, the theoretical and empirical arguments advanced to constrain the TPWR are weak. Thirdly, the paper conducts a large-scale study of industries’ TPWR and reports that the variability (i) of these ratios and (ii) their central tendencies, although limited, do not support the constraints necessary for the validity of the theory’s main thesis. The paper argues for the use of full production prices for the study of IRP based on the principle of absolute advantage.

Keywords: Real exchange rates; absolute advantage; profit-wages ratios; capital intensities (search for similar items in EconPapers)
JEL-codes: B51 C67 D33 D57 F31 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2022-10
New Economics Papers: this item is included in nep-hme
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