Re: Xrates, AS-AD, & comparative advantage

[Jim Devine <JNDF%LMUACAD.BITNET@xxxxxxxxxxxxxxxxxx>]

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: jdevine@xxxxxxxxxxxxxxx
Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA
310/338-2948 (off); 310/202-6546 (hm); FAX: 310/338-1950