Value and distribution in small open economies. Pattern of specialization and choice of techniques

This paper extends the classical (Sraffian) theory of value and distribution to a small open economy with interindustry linkages with the rest of the world. The open-economy price system possesses an additional degree of freedom relative to the closed-economy case, reflecting the interaction of the real exchange rate with distributive variables. The additional degree of freedom implies that institutions shaping income distribution (and the exchange rate) can play a much more important role than in closed economies. Within this framework, the pattern of specialization can be formulated as a choice-of-techniques problem. We extend the results in choice-of-techniques to this open economy framework and show how the dominant technique is sensitive to the distributive closure—i.e., to which distributive variable is taken as endogenous—so that conventional rankings of industries by “factor intensity” are not invariant to the distributive closure. Similarly, any ordering of industries based on “competitiveness” can switch across closures, and a general definition of comparative advantage is impossible to be obtained. The results highlight how exchange-rate movements and distribution interact to shape normal prices and specialization in open economies, offering a unified account that nests international input–output linkages and the choice-of-techniques problem.