One of the main questions that any trade theory must be able to answer is why economies domestically produce a certain set of commodities, and do not produce other. To answer this question, the role played by prices in this determination must be fully taken into account. These prices, of course, cannot be the observed or market ones: the potentially infinite number of factors that affect market prices prevents the theory from giving a precise determination of market prices. Unsolvable as it is, however, the question is not relevant from a theoretical point of view: most of these factors have a transitory nature. It is therefore legitimate to concentrate on those factors of greatest persistence and to determine on that basis the center towards which actual prices tend to gravitate over a sufficient period[1].

The analysis here developed is based on the modern version of the classical theory of value and distribution[2], inaugurated by the work of Sraffa (1960) and developed by Garegnani, being his 1984 paper mainly important. However, theories of value and distribution have been raised, in general, considering closed economies. The need of a theory of value and distribution that is specific to the open economy is justified because institutional barriers that impede the free international mobility of (financial) capital and/or the labor force. Therefore, a reasonable hypothesis for the closed economy –the equalization of rental prices– is no longer adequate in the open economy. In this sense, the value and distribution theory for the open economy is not different from a theory of value and distribution capable of dealing not only with non-homogeneous distributive variables, but also able to vary. The present paper aims to develop an extension to value and distribution theory capable of explaining the determination of the pattern of specialization in open economies.

Literature on international trade usually distinguishes two alternatives to analyze the determination of prices in the open economy: the one corresponding to «big economies» and the one corresponding to «small and open economies». As we are interested in analyzing a single economy open to international trade, we will consider only two “countries”: The Home Economy (HE hereafter), and the Rest of The World (RoW hereafter), and we will focus on the first. Although the seminal work of Metcalfe & Steedman (1972; 1981) is followed closely, it’s scope has been extended.

In Section 2 we present briefly a generalized version of Steedman & Metcalfe model that allows interindustry linkages between the HE and the RoW. This model is not only capable of dealing with heterogenous rental prices, but it also explicitly considers the fact that nominal values in different countries are generally expressed in different units of account. So, we also introduce the role played by the exchange rate and its interaction with income distribution. In this way, the effect on normal prices of changes in the exchange rate can also be explained. The possibility, even at the higher level of abstraction, of persistent international differences in the distributive variables also implies that the price system for open economies have additional degrees of freedom vis-à-vis the closed economy case.

In Section 3 this model is narrowed as to consider a small and open economy. It will be shown that, in order to isolate international prices from the technical conditions of production and distribution in our (small and open) HE, the assumption that it only produces non-basics or commodities under extensive differential land rent has to be introduced.

In Section 4 the choice of techniques problem for the closed economy is extended to deal with the existence of alternative methods of production. To do so, however, the choice of techniques problem will be properly extended. This is done first in the context of different processes available in a certain economy ­–i.e. the nationwide choice of techniques problem–. We will then answer the main question that trade theory: because absolute cost advantages prevail, the determination of the set of commodities produced by an economy –i.e., the pattern of specialization– is also a choice between alternative techniques differing in the localization of the cost minimizing process to produce a certain commodity –the worldwide choice of techniques–. The argument will bring us to consider some implications that reinforce the results derived for closed economies. The argument will led us to stress that, contrary to what could be expected by the principle of comparative advantages, the ordering of industries by its international competitiveness can be sensitive to the distributive closure and hence comparative advantages cannot be determined in general. We will also show the impossibility to order techniques according to its factor intensity (even in cases where reswitching and reserve capital deepening are absent!). These are two corollaries from a more general result: the importance of the distributive closure in open economy models of value and distribution when we address how the technique currently in use will change following variations in income distribution, and whether it would vary at all.

Garegnani, P. (1984). Value and Distribution in the Classical Economists and Marx. Oxford Economic Papers, New Series, 36(2), 291-325.

Garegnani, P. (1990). On some supposed obstacles to the tendency of market prices towards natural prices. Political Economy Studies, 6(2), 329-359.

Garegnani, P. (1990). Quantity of Capital. En J. Eatwell, M. Milgate, & P. Newman (Edits.), Capital Theory. New Palgrave.

Metcalfe, J. S., & Steedman, I. (1972). Reswitching and Primary Input Use. The Economic Journal, 82(325), 140-157.

Metcalfe, J. S., & Steedman, I. (1981). Some Long-Run Theory of Employment, Income Distribution and the Exchange Rate. The Manchester School, 49(1), 1-20.

Parrinello, S. (1990). Some reflections on classical equilibrium, expectations and random disturbance. Political Economy - Studies in the Surplus Approach, 9(1-2), 113-124.

Parrinello, S. (1998). Equilibrium. En H. D. Kurz, & N. Salvadori (Edits.), The Elgar Edward Companion to Classical Economics. Cheltenham: Edward Elgar.

Petri, F. (2004). General Equilibrium, Capial and Macroeconomics: A key to recent controversies in equilibrium theory. Cheltenham, UK: Edward Elgar.

Petri, F. (2011). On some aspects of the debate on the gravitation of market prices to long-period prices. En R. Ciccone, C. Gehrke, & G. Moniovi (Edits.), Sraffa and Moder Economics. London: Routledge.

Sraffa, P. (1960). Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge: Cambridge University press.

Steedman, I. (1984). Natural prices, differential profit rates and the classical competitive process. The Manchester School, 52(2), 165-172.

[1] On gravitation of market prices around normal prices c.fr. Steedman (1984), Garegnani (1990), Parrinello (1990; 1998) and Petri (2011).

[2] At risk of oversimplification, it can be said that there are two main theories –i.e. the marginalist and the classical– which provide an answer to the question of what determines the exchange value of goods in a market economy. The marginalist theory faces an insurmountable obstacle in the treatment of the capital factor, making it unable to give a satisfactory determination of normal prices. The overall problem has been studied in depth in the literature, so this theory will not be discussed in this paper, c.fr. Garegnani (1990) and Petri (2004).