Relative prices and international competitiveness
Abstract
In the last few years, Brazil has seen its trade balance deteriorate significantly.
Although some people defended these results as a necessary ingredient of the stabilization
and growth process now in course, the fact that a similar experience, lived by Mexico, ended
up in a severe debt crisis in December 1994, represents a serious warning. Trying to differentiate
the two cases some people have argued that the Mexican difficulties originated in an
incorrect political transition. On the other hand, this paper suggests that in both cases, there
is a variable indicative of economic incentives, namely “the relative price of home and tradable
goods”, that could explain the behaviour of the trade balance. Regressions estimated
for the two countries document this conclusion.
JEL Classification: F14; F60.
Keywords: Trade balance PPP liberalization relative prices trade deficit