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By A.P. Thirlwall

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Extra resources for Balance-of-Payments Theory and the United Kingdom Experience

Example text

K. exports is inelastic, provided that the inelasticity does not give a supply curve of dollars with a flatter negative slope than the demand curve for dollars. We shall derive more precisely in Chapter 3 the precise elasticity conditions with respect to the demand for exports and imports for a depreciation of the exchange rate to improve the balance of payments starting from equilibrium (the so-called Marshall-Lerner condition). K. exports to the United State to be elastic over one range of prices and inelastic over another range of prices, so that the foreign-exchange market is stable at one rate of exchange but unstable at another rate of exchange.

Wage-earners must accept a cut in real wages which a reduction in the real terms of trade through devaluation implies. If money wages chase prices upwards, there can be no change in the real terms of trade and the balance-of-payments disequilibrium remains. Despite the criticisms levelled against countries in the 1950s and 1960s for maintaining fixed exchange rates at the apparent sacrifice of domestic employment, the movement from fixed to flexible exchange rates in the 1970s has not been conspicuously successful in reconciling payments balance with full employment and has undoubtedly exacerbated inflation.

One such reconciliation is to use the actual balance of payments in comparison with an estimate of the fullemployment, restriction-free balance of payments, and this would highlight more clearly the policies that need to be pursued for the reconciliation of objectives. This is the approach preferred by Meade (1951 ), who draws the distinction between the 'true' and 'potential' balance of payments, the latter being the full-employment, restriction-free balance and the 'true' balance being the balance of autonomous trade and transfers which must be matched by accommodating transfers.

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