CO‐MOVEMENTS IN RELATIVE COMMODITY PRICES AND INTERNATIONAL CAPITAL FLOWS: A SIMPLE MODEL

CO-MOVEMENTS IN RELATIVE COMMODITY PRICES AND INTERNATIONAL CAPITAL FLOWS: A SIMPLE MODEL Suppose a number of countries produce a commodity which employs local labor and a type of capital that is internationally mobile. Within the framework of a specific-factors model the paper argues that there is a presumption about the international movement of capital when the relative price of the industry using that capital rises on world markets. Capital flows towards countries less heavily involved in producing the commodity; internal labor flows contribute towards worldwide industry dispersion; and the volume of international trade in that commodity tends to fall. I. INTRODUCTION Fluctuations in the composition of world demand may cause a particular commodity to experience periods during which price is high relative to other commodities to alternate with periods during which price is relatively low. A number of countries may share not only in the production of such a commodity but also in the use of some factor (call it capital) specific to its production but capable of being relocated from one country to another. That is, some productive activities may combine local factors with inputs that have international markets. What can be said about the location of internationally mobile capital as shifts in demand result in changes in relative commodity prices? Is there anything systematic about the likely degree of international concentration or diversification of production over periods in which a commodity's price is alternatively high and low? The purpose of this article is to sketch out a simple model in which a presumption does exist about the location of internationally mobile capital, the relative concentration of production, and the volume of international trade in a commodity during the course of a cycle in its price relative to the prices of other commodities. The model is a variant of the sector-specific general equilibrum production model in which one type of capital is internationally mobile so that rates of return remain equalized among countries. The presumption is that when a commodity's price is relatively high compared with other commodities, real capital specifically used to produce that commodity tends to leave regions that are relatively large producers. Furthermore, this tendency of international capital mobility to encourage a dispersion of world production when a commodity's price is relatively high and a concentration of the world's production when price is low is enhanced by the mobility within each country of factors used jointly with other sectors. Finally, international trade in a commodity experiencing such a price cycle tends to be "second best" compared with own production in the sense that the volume of trade tends to contract precisely when the commodity's price is high relative to other commodities. II. THE PRESUMPTION ABOUT INTERNATIONAL CAPITAL FLOWS Production structures within countries are assumed to follow the sector-specific model as described in Jones [1975]; mobile labor is combined with each of several types of specific capital goods in producing outputs. In one activity capital is assumed to be internationally mobile, although retaining its sectoral specificity. Such mobility serves to equalize the return to this factor in all areas in which it is employed. Although commodities are traded, technologies and factor endowments are not assumed to be the same, so the returns to local specific factors and national wage rates can differ from country to country. Although the argument can be posed in the context of a many-country trading world, the logic is more easily revealed in a two-country setting. Suppose both home and foreign countries each produce a number of traded commodities and one of these, say x1, makes use of a specific factor, say K1, which is mobile internationally. Such mobility ensures that the rental on type-1 capital at home, r1, is kept in line with the foreign return, r1*. …