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Two Case Studies of Balance-of-Payments Constrained Growth: The UK and Australia

  • J. S. L. McCombie
  • A. P. Thirlwall

Abstract

Up until now, the evidence for a country being balance-of-payments constrained has been obtained by examining the extent to which the balance-of-payments equilibrium growth rate approximates to the actual growth rate of that country. Using data from highly aggregated export and import demand functions, we concluded in Chapter 3 that for the vast majority of countries there was no significant difference between the two growth rates. From this we deduced that relative prices played an insignificant role in determining the growth of imports and exports (or, more implausibly, any effect was just compensated by offsetting capital flows). Additional support for our argument is provided by the fact that the relative price terms in the estimation of import and export demand functions are either small or statistically insignificant, or both (e.g. Houthakker and Magee, 1969). Nevertheless, while these results are instructive, the estimation of such highly aggregated export and import demand functions has been criticised because of, for example, the unreliability of the data and the problem of simultaneity (Morgan, 1970). Moreover, it is not possible to test directly the significance of the inflationary feedback from a currency depreciation to domestic costs (i.e. the real wage resistance hypothesis). The estimates of the price elasticities are also insufficiently precise to permit us to determine with any degree of confidence to what extent (if at all) the Marshall-Lerner conditions are satisfied. On the other hand, as we have seen, changes in relative prices are a relatively unimportant determinant of changes in export and import market shares, compared with disparities in non-price competitiveness.

Keywords

Exchange Rate Current Account Trade Balance Export Performance Current Account Deficit 
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Copyright information

© J. S. L. McCombie and A. P. Thirlwall 1994

Authors and Affiliations

  • J. S. L. McCombie
  • A. P. Thirlwall

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