The Meade cases again

In Chapter 16 we argued that fiscal and monetary policies can deal with combinations of inflation deficit or recession surplus quite successfully, but that they encounter serious conflicts in the recession deficit or inflation surplus situations. In this chapter we have suggested that devaluations are much more likely to succeed in adjusting a payments deficit if the economy is in a recession at the time the exchange rate change is undertaken and that revaluations are more likely to succeed at...

Quotas and other nontariff trade barriers

As was noted earlier, barriers to trade other than tariffs have become far more important in recent years as governments have looked for ways to restrict imports without raising tariffs that were reduced in GATT negotiations. Quotas, which are limits on the physical volume of a product that may be imported per period of time, are the most transparent NTB, but there are many others. The mere fact that a policy reduces imports does not make it a trade barrier, however it must discriminate against...

Requirements for a successful devaluation

For a devaluation to succeed in adjusting a chronic payments deficit, a number of conditions must be met. Devaluations have both microeconomic and macroeconomic effects that can complicate the payments adjustment process. The microeconomic requirements for a successful devaluation, which are typically less serious, will be discussed first. Macro-economic problems, which are often much more demanding, follow. The Marshall-Lerner condition the desirability of high elasticities of demand In the...

The shift to multilateralism under the GATT

During and after World War II, plans were drawn up for an International Trade Organization through which nations could regulate and coordinate their commercial policies. In 1945 the United States presented a draft charter for such an organization that would serve as a counterpart, in the field of trade and commercial policy, to the International Monetary Fund in the monetary field. However, this proposed charter ran into heavy opposition. When the US Congress declined to approve it, it was...

Empirical verification in a world with many goods

As in the case of the classical model, formulating an appropriate empirical test of the stylized 2 X 2 X 2 model is difficult because actual data come from a world where there are many goods and many factors of production. Also, we cannot observe autarky or pre-trade costs, and therefore we must infer what they would be, based on characteristics such as factor endowments or factor intensities. Two basic approaches have been developed by past researchers one attempts to predict trade in...

Notes

1 David Hume, On the Balance of Trade, originally written in 1752, published in D. Hume, Essays Moral, Political, and Literary London Longmans Green, 1898 , reprinted in R. Cooper, ed., International Finance Selected Readings Baltimore Penguin, 1969 . 2 R. Triffin, The Myths and Realities of the So-Called Gold Standard, in R. Triffin, Our International Monetary System Yesterday, Today, and Tomorrow New York Random House, 1968 , ch. 1. See also B. Eichengreen, ed., The Gold Standard in Theory...

Box 162 Islmbp analysis of adjustment under the Bretton Woods system

If a country tightens its monetary policy to adjust a payments deficit, the IS LM BP representation is the same as for the specie flow system presented earlier. The only difference is that the central bank decides to tighten monetary policy rather than having a reduction of the money supply result automatically from a loss of gold reserves see Figure 16.10 . The effects of fiscal policy on the balance of payments are more complicated and depend on the relative slopes of the LM and BP lines. The...

Box 42 Further reasons for economies of scale the learning curve

Fixed costs and increasing returns to scale are not the only reasons why average costs of production fall as output rises. Another important factor in some industries has been the learning curve, which relates the firm's average cost of production to its cumulative output. An example of the way we might express such economies is that every time a company doubles its output, costs per unit fall by 25 percent. Such reductions in cost may occur due to better organization and scheduling of complex...