Book contents
- Frontmatter
- Contents
- List of Tables and Figures
- Preface
- Part I A review of the terrain
- Part II Theory and empirical analysis
- 4 Market incompleteness in an open-economy LDC
- 5 The relationship between real and nominal exchange rates
- 6 Empirical investigation of real exchange rates: Tradability and relative prices
- 7 An endogenous growth model of incomplete markets in foreign exchange
- 8 Are devaluations possibly contractionary? A quasi-Australian model with tradables and nontradables
- Part III Successes and failures in development: Good/bad economics and governance
- Bibliography
- Index
4 - Market incompleteness in an open-economy LDC
Published online by Cambridge University Press: 27 October 2009
- Frontmatter
- Contents
- List of Tables and Figures
- Preface
- Part I A review of the terrain
- Part II Theory and empirical analysis
- 4 Market incompleteness in an open-economy LDC
- 5 The relationship between real and nominal exchange rates
- 6 Empirical investigation of real exchange rates: Tradability and relative prices
- 7 An endogenous growth model of incomplete markets in foreign exchange
- 8 Are devaluations possibly contractionary? A quasi-Australian model with tradables and nontradables
- Part III Successes and failures in development: Good/bad economics and governance
- Bibliography
- Index
Summary
Conventional trade theory has generally credited free-market, free-trade, laissez-faire capitalism with producing equilibrium, market-clearing prices and leading to Pareto optimality. An economy is considered efficient in production if the supply of any good (or service) cannot be increased without reducing the supply of another good. The last qualification about decreasing the supply of another good has to be interpreted broadly in an open economy, since trade is considered an indirect form of production: a certain good whose supply was decreased for producing another can now become available by exchanging exports for it. The point of operation in this trade-extended production possibility frontier is determined by the relative border prices of exports and imports. Border prices, therefore, determine the opportunity cost of a good and of the resources used to produce it, if the alternative of using a good were to export it. Similarly, scarcity values measure what the good is worth to the economy, which can be calculated from the production possibility frontier (PPF) by the value of the additional exports a good could be turned into. Opportunity costs are equated with scarcity values for production efficiency. Border prices, therefore, represent efficiency prices, and no need for shadow-pricing of inputs or outputs arises.
The above describes fully the conventional textbook approach to international trade where the commodity produced, and exports and imports, are considered a Hicksian composite good of all commodities that enter consumption and trade in the economy.
- Type
- Chapter
- Information
- Exchange Rate Parity for Trade and DevelopmentTheory, Tests, and Case Studies, pp. 63 - 84Publisher: Cambridge University PressPrint publication year: 1995