International Trade In Capital Goods

International trade theory has been dominated for many decades by models that either

explicitly, or implicitly evade altogether the questions of the heterogeneity of capital

goods, and the issue of distribution as a consequence of international trade. The capital

controversies of the 1960's have had inevitable implications for neoclassical trade

theories that were based on the notion of capital as non-produced endowments whose

quantity is defined independently of the prices of good. Four kinds of developments have

taken place in the literature since then.

(1) Steedman1 and his co-authors wrote a series of papers to show that if the

distinction between capital as the value of heterogeneous capital goods and the

capital goods themselves is made, as it ought to be made, many of the standard

propositions and theorems of modern trade theory would either fail to hold or

would, at the very least, have to be heavily qualified.

(2) Dornbusch, Fischer & Samuelson2, Shiozawa3 and others, on the other hand,

developed the Ricardian model and extended it to several commodities including

trade in intermediate goods. Specifically, they showed that with international

trade in intermediate goods it is no longer possible to solve the price system of

any country in isolation from the price systems of its trading partners; the price

system becomes international in nature.

(3) Eaton and Kortum4 developed a model of multi-country multi-commodity trade

which allowed trade in intermediates but assumed quite restrictively that the

pattern of absolute and comparative advantages across countries and commodities