The United States, during the past several years, has squandered a heaven-sent opportunity to cement its already deep economic relations with Latin America. There is no certainty that the neglect will be altered in the near term.

A series of transformations made the 1990s an ideal time to consolidate improved economic relations with Latin America. The end of the Cold War meant that US dealings with Latin America could be based on mutual realities in the Hemisphere rather than be shaped through the one-way prism of East-West confrontation. There was a profound paradigm shift that swept just about all the countries of the Hemisphere, away from protectionism and toward open markets as the path to economic growth.

Trade policy throughout the Western Hemisphere is in a state of flux, more so now than at any other time in the postwar period. Among policy officials in Latin America, the Caribbean, and North America, there is general agreement on many trade policy issues but uncertainty about others. Although this paper starts with areas of agreement, it focuses upon those issues for which there is no consensus.

The Moment of Truth has come for the North American Free Trade Agreement (NAFTA). The US Congress will have to stop talking and vote to accept or reject the agreement negotiated among Canada, Mexico, and the United States. The disagreement on NAFTA in the United States is about free trade with Mexico, not with Canada. A US-Canada free trade agreement (FTA) already exists.

This controversy over NAFTA has been fierce in the United States, much more so than in Mexico. This comparison speaks volumes about changing attitudes. It was almost unthinkable a decade ago that Mexico would so drastically alter its traditional position of maintaining economic and political distance from the United States. This change would not have been possible but for la decena trágica, the years of the 1980s. Beyond that, Mexico has more at stake in a free trade agreement. It has the smaller economy (about 1/27th that of the United States) so that changes, for better or worse, are magnified.

Trade Policy in the Western Hemisphere is undergoing major transformation. Developments during the past few years include entry into force of the Canada-US free trade agreement; the prospect of negotiations among Canada, Mexico, and the United States toward a North American free trade area; efforts to deepen economic integration between Argentina and Brazil; and the initiative of President George Bush for free trade in the Western Hemisphere.

Had the Bush proposal been put forward a decade or so ago, it would have been greeted with suspicion, perhaps even derision, as just another neocolonial US maneuver to keep Latin American and Caribbean (LAC) countries from developing their industrial capacity. Its reception, however, was generally favorable, even enthusiastic. It is premature to expect the conclusion of free trade agreements between LAC countries, other than Mexico, and the United States, but there is a dynamic moving in this direction.

Prime Minister Brian Mulroney requested the opening of trade talks with the United States on September 26,1985. He did not use the words “free trade,” but that was the gist of the request. He explicitly rejected a common market or a customs union and implicitly dismissed the sectoral free-trade approach. The US administration responded positively and requested permission from the Congress to open negotiations. Negotiating teams have been appointed and discussions are taking place. All the actors noted that the negotiations will be difficult and may last several years. After more than a decade of avoiding the issue, Canada has acted. The context is complex because of growing US protectionism, including concern over certain imports from Canada, especially lumber. Fear of this protectionism was one reason for the Canadian decision. Another was concern about the future of Canada's economy. The Canadian economy has performed poorly for much of the past ten years.

Trade policy has played a larger role in the internal and international relations of Canada than of the United States, certainly in the last half century. There are many reasons for this: The Canadian economy is more open than that of the United States (e.g., merchandise exports as a percentage of gross national product were 30% in Canada and 7% in the United States in 1982); the United States is far more dominant in Canada's trade than any single country or group of countries such as the European Economic Community is in U.S. trade (in recent years about 70% of Canada's exports have been sent to the United States and more than 70% of its imports came from the United States; for the United States, about 15% of its exports in recent years went to Canada, its major trading partner, and between 15% and 20% of its imports have come from Canada); and with this double dependence on trade and on a single market, a selfinterested foreign policy must concentrate on trade policy (Grey, 1981: 3-4).

The theory of prices developed by Keynes in the General Theory is always likely to appeal strongly to the student approaching the subject from the side of value theory for in his analysis customary supply-demand categories are reaffirmed. Yet, despite its insights, his analysis here is incomplete: although there is a fairly detailed account of the supply curve the chapter is vague on the exact composition of the corresponding demand function. This paper reviews the problem, constructs an appropriate demand-supply apparatus, and uses it to analyse the determination of the price level of consumer goods, as measured by index numbers. It appears, however, that the same technique can be extended to explain the price level of investment goods if certain of the functional connections are modified.

The essential distinction between the analysis of the firm (or industry) and the analysis of the economy is that in the former supply and demand can be regarded as independent, whereas in the latter interdependence must be stressed from the very beginning. Causally, however, it is usually argued that the initial impetus comes from the supply side. Factors are viewed as being paid for by reason of entrepreneurial decisions to hire them for productive uses, and resource owners as thereafter expending these earnings, in whole or in part, on the forthcoming consumer good output. Viewing this as the essential proposition descriptive of the economic process, let us develop its implications for the theory of the price level.