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Trade Balance and Exchange Rates

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Global Disequilibrium in the World Economy

Part of the book series: Central Issues in Contemporary Economic Theory and Policy ((CICETP))

Abstract

One of the most remarkable facts about the development of international economics in the past 50 years has been the persistence of the belief that a country can improve its balance of trade by devaluing its currency. More generally, it is believed that just as a profit-maximizing monopolistic firm producing under constant costs can improve its sales and thereby its profitability by lowering its costs and thus its selling price provided the elasticity of demand for its product is greater than unity, a country can be become more “competitive” and improve its balance of trade by cutting the prices of its export goods provided the sum of its elasticity of demand for imports and the foreign elasticity of demand for its exports exceeds unity. (For brevity, the terms “balance of trade” and “trade balance” are used rather improperly throughout this paper to stand for the balance of payments on goods and services. The term “foreign balance” has an equivalent meaning.)

This work was supported by the [US] National Science Foundation, grant SES-8607652.

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Author information

Authors and Affiliations

  1. University of Minnesota, USA

    John S. Chipman

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  1. John S. Chipman
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Editor information

Editors and Affiliations

  1. University of Rome, ‘La Sapienza’, Italy

    Mario Baldassarri (Professor of Economics) (Professor of Economics)

  2. McGill University, Monteal, Canada

    John McCallum (Professor of Economics) (Professor of Economics)

  3. Columbia University, New York, USA

    Robert Mundell (Professor of Economics) (Professor of Economics)

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© 1992 SIPI Srl, Rivista di Politica Economica

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Chipman, J.S. (1992). Trade Balance and Exchange Rates. In: Baldassarri, M., McCallum, J., Mundell, R. (eds) Global Disequilibrium in the World Economy. Central Issues in Contemporary Economic Theory and Policy. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-22269-8_8

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