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CapitalismCompetition, Conflict, Crises$
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Anwar Shaikh

Print publication date: 2016

Print ISBN-13: 9780199390632

Published to Oxford Scholarship Online: March 2016

DOI: 10.1093/acprof:oso/9780199390632.001.0001

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International Competition and the Theory of Exchange Rates

International Competition and the Theory of Exchange Rates

Chapter:
(p.491) 11 International Competition and the Theory of Exchange Rates
Source:
Capitalism
Author(s):

Anwar Shaikh

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199390632.003.0011

This chapter extends the classical argument to international competition and terms of trade (real exchange rates). Standard comparative cost theory is the foundation of almost all approaches to international trade, either in direct application or as a point of departure for theories of imperfect competition, asymmetric information, etc. It is formally shown that international competition actually leads to absolute cost advantage because international cost advantages and disadvantages are largely immune to exchange rate variation. Low cost countries will have persistent trade surpluses and the resulting net inflow of funds will increase liquidity and lower their interest rates: high cost countries will suffer trade deficits and a concomitant rise in interest rates. The interest rate differential will lead to short-term capital outflows from trade surplus countries to trade deficit countries: the former will end up as international creditors and the latter as international debtors—all through the workings of free trade.

Keywords:   international competition, absolute cost, terms of trade, interest rate, free trade

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