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Transfer of Means-of-Payment and the Terms of International Trade

Published online by Cambridge University Press:  07 November 2014

G. A. Elliott
G. A. Elliott*
Affiliation:
The University of Alberta
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Extract

In the recent English literature of international trade theory, one element in the adjustment of the balance of international payments has been brought once more into prominence, especially with regard to unilateral payments. It is described by various writers as the transfer of “purchasing power”, or of “buying power”, or of “means of payment”, or as a “shift in demand schedules”, which induces the receiving country to buy more goods and services and the paying country to buy less goods and services “in the absence of price changes”. This factor in the adjustment of the balance of payments was implied by Adam Smith, Ricardo, and Wheatley. Longfield referred to it explicitly. Bastable mentioned it in a journal article and Nicholson placed considerable emphasis on it. Mill, however, omitted it from his analysis. After 1900 it dropped from sight until 1918 when it cropped up again in a controversy in which Taussig, Wicksell, and Hollander took part. It was noticed in Viner's Canada's Balance and by 1931 had been developed considerably by Wilson, Ohlin, and Robertson. Since that time it has appeared in the published works of a large number of economists.

Many of the earlier proponents of the theory denied that unilateral transfers could change the terms of trade. To them it seemed obvious that the payment would by itself increase the purchases of the receivers and diminish the purchases of the payers by the amount of the payment. Thus the commodity balance would become unfavourable to the receiving country by the amount of the payment without price changes. Mill, on the other hand, and those who accepted his analysis in its entirety, claimed that the familiar specie-flow-price mechanism would necessarily lead to a change in the terms of trade in a direction favourable to the receiving country.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 2 , Issue 4 , November 1936 , pp. 481 - 492
Copyright
Copyright © Canadian Political Science Association 1936

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References

1 See, e.g.: Viner, J., Canada's Balance of International Indebtedness 1900-1913 (Cambridge, Mass., 1924)Google Scholar, and his article on “International Trade” in the Encyclopaedia of the Social Sciences; Ohlin, B., “The Reparation Problem” (Index, Stockholm, no. 28, 1928)Google Scholar; Wilson, R., Capital Imports and the Terms of Trade (Melbourne, 1931)Google Scholar; Robertson, D. H., “Notes on International Trade” (in Economic Essays and Addresses, London, 1931)Google Scholar; Yntema, T. O., A Mathematical Reformulation of the General Theory of International Trade (Chicago, 1932)Google Scholar; Pigou, A. C., “Reparations and the Ratio of International Interchange” (Economic Journal, 12, 1932)CrossRefGoogle Scholar; Whale, E., International Trade (London, 1932)Google Scholar; Ohlin, B., Interregional and International Trade (Cambridge, Mass., 1933)Google Scholar; White, H. D., The French International Accounts, 1880-1913 (Cambridge, Mass., 1933)CrossRefGoogle Scholar; Harrod, R. F., International Economics (Cambridge, 1933)Google Scholar; Iversen, C., International Capital Movements (Oxford, 1935).Google Scholar von Haberler, G., The Theory of International Trade (London, 1936)Google Scholar, was not available to me when this paper was prepared.

2 I find it impossible to acknowledge in detail my indebtedness to Professor Viner's lectures and discussions. I was privileged to read last summer in manuscript an addendum to an article which he was preparing. Sections III and IV of this paper are in part a development of the comments which I submitted to him. Consequently, I have had his criticisms on several points. If I did not benefit from them the fault is mine alone.

3 E.g. Wilson, , Capital Imports, pp. 79–80 Google Scholar; White, , The French International Accounts, p. 20 Google Scholar; Iversen, , International Capital Movements, pp. 230–1.Google Scholar

4 “Reparations and the Ratio of International Interchange”.

5 It is implied also that costs of transport may be neglected.

6 “Reparations and the Ratio of International Interchange”, pp. 532-5.

7 I am indebted to Professor Viner for calling my attention to this similarity between his method and Professor Pigou's.

8 “Reparations and the Ratio of International Interchange”, pp. 539-40.

9 This is, of course, a very special case. It implies that under equilibrium price conditions the spendable resources of the two countries are equal before the payment is made. Cf. Wilson, , Capital Imports, p. 71.Google Scholar

10 Cf. Ohlin, , Interregional and International Trade, pp. 406–8.Google Scholar

11 Cf. Harrod, , International Economies, pp. 118–21.Google Scholar Harrod seems to suggest that this net change in aggregate factor income must occur. The position taken here is that it is probable. It is, however, possible that no net change will occur or that it will be in the opposite direction. Cf. infra, Case III.

12 Cf. Wilson, , Capital Imports, p. 81.Google Scholar

13 Ohlin notes (Interregional and International Trade, p. 439) that obstructions to trade tend to increase the extent of the change in the terms of trade but does not explicitly note the effect on the probable direction.

14 Cf. Harrod's review of Wilson ( Economic Journal, 1932, p. 431 Google Scholar). For what appears to be an opposing view see Iversen, , International Capital Movements, p. 235 Google Scholar; see also, however, pp. 479-80 and p. 483.

15 Cf. supra footnote 11.

16 In this discussion, what Ohlin and Iversen term the “secondary” changes in means of payment have been taken into account. No mention, however, has been made of the probable “tertiary” expansion and contraction of bank credit or of the other elements in the Mill mechanism.

17 Cf. Iversen, , International Capital Movements, p. 292.Google Scholar

18 It might be argued, however, that the production of borrowing countries is often highly specialized. In these cases there is a probability that the receiving country uses a larger proportion of its resources than does the paying country in obtaining “neutral-country” commodities.

19 If, however, specialization is incomplete, the neutral country may also produce the export commodity of either or both the other countries. In the latter case, under constant cost conditions, no change in the terms of trade between the paying and receiving countries can take place in the long run until the neutral country finds it profitable to cease producing one of the commodities.

20 Interregional and International Trade, p. 408.

21 Ibid., pp. 418-20.

22 Ibid., pp. 429-30.

23 Ibid., p. 430.

24 Ibid., p. 431.

25 Ibid., pp. 420-6.

26 International Capital Movements, p. 235.

27 Ibid., p. 482.

28 These considerations suggest some modification of one of Iversen's final conclusions concerning the probable direction of changes in the terms of trade (ibid., p. 511).

29 Cf., e.g., ibid., pp. 312-3; White, , The French International Accounts, p. 23 Google Scholar; and Taussig, , International Trade (Macmillan, 1933), pp. 399 and 406–7.Google Scholar