During his honours research on an index of industrial production at the University of Western Australia, Salter gained an understanding of the composite commodity theorem. The applied work on the index of industrial production provided him with the analytic foundations for his two famous contributions to economic theory, in capital theory and international trade theory. In his Ph.D. thesis at the University of Cambridge he agreed with Joan Robinson that it is impossible to measure the aggregate capital stock because the assumptions of the composite commodity theorem do not hold in a general equilibrium framework. But Salter was not bothered by the elusive nature of capital because he saw no need to measure the capital stock in the first place. He developed a vintage model of capital, in which technical progress occurs at the margin of the capital stock, when new investment goods are installed. In the dependent economy model Salter, however, accepted the aggregation of exportables and importables because in a small open economy the terms of trade are unaffected by domestic economic policy. Thus, Salter recognised that the capital stock is an invalid aggregate in a macroeconomic model, but internationally traded goods are a valid aggregate in the dependent economy model. His success as an economic theorist lies in the fact that he understood when to apply the composite commodity theorem as an analytic tool, and when to avoid it.
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