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Some Empirical Evidence on the Behaviour of Export and Domestic Prices in Belgian Manufacturing Industry

Published online by Cambridge University Press:  17 August 2016

D.J. Frantzen*
Affiliation:
Free University of Brussels (VUB) and Darwin College, Cambridge.
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Extract

A widespread view expressed in the theoretical macroeconomic literature concerned with price formation in open economies is that, in the absence of impediments to trade and insulating exchange rate movements, the prices of their internationally tradable goods are, by and large, determined at the level of competitive international markets. The most common justification is that the goods concerned are produced by a large number of firms from different countries, and that competitive commodity arbitrage tends to integrate the respective markets by eliminating all price divergences (in common currency). If so, the industries of the individual small economy can be conceived as competitive foreign price takers, implying both the dominance of foreign price influences over domestic costs,and a high degree of price flexibility with respect to short-term fluctuations in (international) demand.

Type
Research Article
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1985 

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