INTERNATIONAL TRADE AND PAYMENTS By the same author INTERNATIONAL MONETARY POLICY (1957 and 1961) (1968) THE LONDON DISCOUNT MARKET International Trade and Payments W M Scammell Macmillan Education © W M Scammell 1974 Softcover reprint of the hardcover 1st edition 1974 All rights reserved No part of this publication may be reproduced or transmitted, in any form or by any means, without permission First published 1974 by THE MACMILLAN PRESS LTD London and Basingstoke Associated companies in New York Dublin Melbourne Johannesburg and Madras SBN 333 13679 ISBN 978-1-349-01557-3 ISBN 978-1-349-01555-9 (eBook) DOI 10.1007/978-1-349-01555-9 'The why of the world is an answerless riddle Puzzlesome, tiresome, hard to unriddle.' JAMES JOYCE Contents PREFACE Abbreviations and Acronyms Introduction xi xiii Part One THE PURE THEORY OF INTERNATIONA L TRADE The Aims and the Tools (i) What the pure theory is about (ii) The basic questions - comparative advantage (iii) Conclusion 13 13 15 27 Supply, Demand, and the Gains from Trade 28 28 35 (i) (ii) (iii) (iv) (v) Supply with constant costs Other cost patterns Transport costs; technological change Demand Conclusion Appendix: the offer (or reciprocal demand) curve 44 52 64 66 Factor Endowments: Commodity and Factor Prices 73 73 74 78 99 110 Putting Theory to the Test: Empirical Studies 113 113 114 120 127 (i) (ii) (iii) (iv) (v) (i) (ii) (iii) (iv) Introduction Factor endowments Production functions and box diagrams The Heckscher-Ohlin theorem Factor-price equalisation Introduction The classical theory and the Heckscher-Ohlin theorem Empirical testing The terms of trade Contents viii Part Two COMMERCIAL POLICY Tariffs (i) Tariffs: the mechanism (ii) Tariffs: the effects 137 137 141 Free Trade and Protection (i) Introduction (ii) The free trade versus protection controversy (iii) Getting nearer to free trade: trade liberalisation (iv) The second best 169 169 171 179 184 The Theory of Customs Unions (i) Customs union theory (ii) The effects on trade, production, and consumption (iii) The general equilibrium analysis (iv) The dynamic effects (v) Some practical implications 189 189 191 203 210 213 Trade and the Nature of the Market (i) Introduction (ii) Monopoly and imperfect competition in international trade (iii) Trade practices and their effect on the market (iv) State trading 219 219 220 228 234 Part Three THE ECONOMICS OF THE BALANCE OF PAYMENTS I The Description and Measurement of Payments I The Elements of an International Monetary System (i) The four elements (ii) The forms of international money (iii) The institutional arrangements of international finance (iv) The need for an adjustment mechanism (v) Leadership and control of the international economy (vi) Conclusion 245 245 247 250 253 258 263 Contents 11 ix The Balance of Payments: Cross-section of a Nation's Trade (i) Surplus and deficit (ii) Balance-of-payments disequilibrium (iii) Causes of disequilibrium 266 266 279 286 II Adjustment of a Country's Balance of Payments 12 The Role of the Price Mechanism in Adjustment (i) The nature of the adjustment problem (ii) Adjustment: the classical approach (iii) Summing up 13 Adjustment and Income Analysis (i) A Keynesian approach (ii) The import and export functions (iii) National income in a closed and an open economy (iv) Diagrammatic analysis of the open economy (v) National income adjustment and the balance of payments (vi) Monetary factors and income adjustment (vii) Conclusion 14 The Interaction of Price and Income Changes (i) (ii) (iii) (iv) (v) (vi) The need for a synthesis Second thoughts on elasticity The absorption approach The payments approach The critics of absorption Conclusion 15 Adjustment and International Capital Movements (i) (ii) (iii) (iv) (v) Statement of the problem The classical theory The modern theory The terms of trade Conclusion 16 Internal and External Equilibrium (i) (ii) (iii) (iv) The conflicting aims of economic policy Expenditure-switching and expenditure-changing The coupling of monetary and fiscal policy The distribution between countries of the burden of adjustment (v) Conclusion 291 291 297 317 319 319 321 324 332 339 340 346 348 348 349 352 357 362 369 370 370 372 374 380 385 387 387 389 396 401 407 X m Contents Some Current Account Problems 17 Trade and National Currencies: the Foreign Exchange Market (i) The foreign exchange market (ii) The modus operandi of international payments (iii) The determination of the foreign exchange rate (iv) The Euro-dollar market 411 411 426 428 441 18 Exchange Rate Policy 445 445 445 455 457 460 473 482 19 Direct Controls on Trade and Payments 485 485 488 504 (i) (ii) (iii) (iv) (v) (vi) (vii) Introduction The equilibrium exchange rate The systems of adjustment Adjustments in domestic income and prices Free rates of exchange Managed flexibility The choice of an adjustment system (i) Introduction (ii) The mechanism of control (iii) Uses and abuses 20 Adjustment and International Liquidity 508 508 508 525 534 21 The Bretton Woods System and the International 536 (i) (ii) (iii) (iv) Introduction The nature and need of international liquidity The gold standard and the gold exchange standard Conclusion Monetary Fund (i) Introduction (ii) The model and operation of the Fund (iii) Reform of the Fund (iv) The present position 536 536 550 555 NOTES 557 BIBLIOGRAPHICAL NOTE 574 INDEX 597 .. .INTERNATIONAL TRADE AND PAYMENTS By the same author INTERNATIONAL MONETARY POLICY (1957 and 1961) (1968) THE LONDON DISCOUNT MARKET International Trade and Payments W M Scammell... Uses and abuses 20 Adjustment and International Liquidity 508 508 508 525 534 21 The Bretton Woods System and the International 536 (i) (ii) (iii) (iv) Introduction The nature and need of international. .. Monopoly and imperfect competition in international trade (iii) Trade practices and their effect on the market (iv) State trading 219 219 220 228 234 Part Three THE ECONOMICS OF THE BALANCE OF PAYMENTS