Empirical evidence on comparative cost theory from the European Common Market experience

Abstract

Using data on consumer prices in the EEC countries in 1958, the year preceding the initiation of the Common Market, we found these to be generally negatively and significantly rank-correlated with shares in different markets in 1966 as predicted by the comparative cost theory. Regression results also support the comparative cost theory and the thesis that the elasticity of substitution does not vary over commodities: statistical considerations lead us to suspect that the latter amounts to several times the value obtained by most researchers in that field. Finally the comparative cost theory is backed by the significantly negative rank correlation coefficient found between the 1958 ratio of the lowest price of a good in a partner country to that of the price in France with the 1966 share of that partner's export in French consumption. The most surprising result of this exercise, is that, for 15 industrial goods out of 36, price disparities inside the Common Market increased as between 1958 and 1966 or 1970.