Overview

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

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