Terms of trade and class conflict in a computable general equilibrium model for Mexico

A computable general equilibrium model for Mexico is constructed in which class conflict over the distribution of the surplus is the principal determinant of the terms of trade. The model consists of seven social classes and eight productive sectors. Classes are distinguished as ‘fundamental’ or ‘subsumed’ according to whether their incomes are primarily determined by conscious class struggle or by the resulting system of relative prices. Flexible prices are assumed to clear markets for which non‐produced means of production, such as agricultural land, limit supply while output in the remaining sectors is determined by the level of effective demand. For the latter sectors, two theories of price formation are compared and are seen to differ radically in their implicit conception of the nature of class conflict. A ‘Keynes‐Kalecki’ closure is considered in which prices are determined by a fixed mark‐up on costs. This enables capitalists to protect themselves from incursions on the rate of profit due to labour militancy or state‐imposed terms‐of‐trade policy designed to favour peasants andlor the agrarian bourgeoisie. A second, ‘Marx‐Sraffian’ price closure constrains the economy to a wage‐profit‐terms‐of‐trade surface; where the economy conjuncturally resides on this surface depends upon the level of effective demand, wages and terms‐of‐trade policy. Various policy scenarios are investigated under both closures.