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On the Role of Profits-Wages Ratios in the Determination of the Long-Run Behavior of International Relative Prices

Author

Listed:
  • Ferrer, Jacobo

    (New School for Social Research, United States)

  • Martínez-González, Adrián

    (Universidad National Autonoma de Mexico)

  • Torres-González, Luis Daniel

    (Universidad National Autonoma de Mexico)

Abstract

This paper presents a reconstruction and evaluation of the theory of international relative prices (IRP) based on the theory of ‘real competition’.The main thesis of the theory is that the long-run behavior of the IRP of tradable commodity bundles is exclusively determined by their relative total unit labor costs (RTULC). This is equivalent to the assertion that the total profits-wages ratios (TPWR) of these two bundles are sufficiently similar over time and, therefore, neutral in the long run. We identified a set of issues that cast doubt on the strength of the theory. Firstly, due to accounting considerations,the proposed hypotheses cannot constrain IRP to depend solely on the RTULC. Secondly, the theoretical and empirical arguments put forth by the literature to constrain the TPWR are weak. The paper presents a comprehensive investigation of industries’ TPWR, which reveals that their statistical regularities do not align with the constraints necessary for the validity of the theory’s core thesis.

Suggested Citation

  • Ferrer, Jacobo & Martínez-González, Adrián & Torres-González, Luis Daniel, 2024. "On the Role of Profits-Wages Ratios in the Determination of the Long-Run Behavior of International Relative Prices," Centro Sraffa Working Papers CSWP67, Centro di Ricerche e Documentazione "Piero Sraffa".
    • Handle: RePEc:ris:sraffa:0067
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    Keywords

    real exchange rates; terms of trade; absolute advantage; unit labor costs; capital intensities.;
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