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.

KEYWORDS:
Trade balance; PPP; liberalization; relative prices; trade deficit