Wait! maybe I'm slow, but I didn't understand Peter this time. It
seems there are two possible results:
(1) exchange rates reflect the current account quickly, so that
international prices change quickly, so that a US price rise
does not induce an "international substitution effect" -- so
one reason for the downward-sloping aggregate demand curve
(in price-real GDP space) does not apply. In this case,
comparative advantage dominates absolute advantage.
OR: (2) prices do not reflect the current account quickly,
so that the international substitution effects do occur and
there is a reason for the AD curve to slope downward. This
also implies that absolute advantage dominates comparative
advantage, at least in the short run.
I think (2) is accurate, but the point is you can't have
"your Kate and Edith too" as a famous Country & Western
song put it. If you see absolute advantage as dominating
comparative advantage, then the AD should slope down
due to international substitution effects.
in pen-l solidarity,
Jim Devine BITNET: jndf@lmuacad INTERNET: [EMAIL PROTECTED]
Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA
310/338-2948 (off); 310/202-6546 (hm); FAX: 310/338-1950
