The Theory Developed for the Balance of Trade
The task of Part II is to assemble the concepts and the methodological tools introduced in the preceding pages into an aggregate, short-run theory of international payments adjustment. This first chapter develops the model in the more familiar analytic realm of a two-country world in which the only international transactions involve current (or factor-using or factor-saving) trade in goods and services as well as a means of payment.1 The theory will necessarily emphasise the determinants of what is expected to occur rather than the international payments target. In a world limited to current transactions the only potential difference between the target and a zero balance is the desire of the focus country to increase its stock of internationally liquid reserves. For simplicity it is assumed that ΔR* is zero. The next three chapters introduce unilateral transfers, transactions on capital account and the latter’s progeny, investment income, and consider the implications of these flows for the theory developed in Chapter 5. The final chapter in Part II presents the model as a single set of interrelations among international targets and instruments that determine the existence or lack of a satisfactory payments position.
KeywordsCompetitive Ratio Trade Balance Foreign Exchange Market Phillips Curve Flexible Exchange Rate
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