The interest rate equalisation theorem with nontraded goods

Abstract

Trade in all goods between countries having the same one primary factor Sraffa-Leontief technique necessarily leads to the equalisation of all rates of interest. Where some commodities are not traded, however, the necessity of global equalisation breaks down. It is shown that, on certain interpretations of the ‘factor’ intensity conditions, nonequalisation need not imply factor intensity reversals. The validity of a ‘local’ version of the theorem is not ruled out for this case but its usefulness appears to diminish, the smaller the number of goods traded.