출처: Chi-Yuen Wu, An Outline of International Price Theories (Ludwig von Mises Institute, 1939 [2007])
목차 | 자료: 구글도서 ; Mises-Institute ;
※ 발췌 / Excerpts
Chapter Ⅶ. Developments since 1918: The Transfer Problem
1. Theories of transfer and their developments before the Great War (p. 272)
Another problem which had been much discussed during the post-War period was the transfer problem. By the “transfer problem” is meant the problem of the mechanism through which an international payment is actually transferred from one country to another or, in other words, the mechanism through which a disturbance in the balance of payments of a country that is caused by the making of a payment to a foreign country is corrected and equilibrium is restored. The international payment may be a reparation payment, an international loan, an interest payment, or a payment of debt arising from a great purchase of foreign goods or services. Allowance should, of course, be made for differences in details, but the main problem is the same for all cases, viz. how does a payment in monetary form ultimately lead to a payment in commodities and services.
There are, as indicated above, two different theories of transfer, viz. the classical theory and the Wicksellian theory. According to classical theory, when a payment has to be made to foreigners but is not accompanied by an equivalent receipt from them, volume of buying power of the country (relative to other countries) would ^ceteris paribus^, become excessive. The currency being excessive, gold, in the case of an international gold standard, will flow out of the country. Prices will fall in that country and rise in the countries receiving gold. Those shifts in the prices of trading countries will encourage exports of the paying country and discourage its imports. Thus the balance of trade turns favourable to the paying country and the payment is ultimately transferred in the form of commodities and services. The essence of the transfer mechanism, as described in the classical theory, is to be found in the contraction or expansion of the volume of circulation and in the fall or rise of prices. The transfer of a payment, therefore, leads to a shift of barter terms of trade in favour of the receiving country.
Wicksellian theory of transfer, on the contrary, denies the shift of the barter terms of trade in favour of the receiving country as a necessary consequence of transfer. According to the Wicksellian doctrine, when a payment to foreigners is not accompanied by an equivalent receipt, the aggregate expenditures or outlays of the country are greater than its aggregate receipts or incomes. The necessary consequence is for those citizens whose incomes are less than their expenditures to contract their expenditures so Equilibrium in the balance of payments is thus restored without any shift in the barter term of trade.
The difference between those two theories of transfer may be explained also by the difference in the assumptions regarding the demand conditions in the countries between which the transfer is made.[:]
Both doctrines of transfer have, as shown above, a long development. It was in the hands of Thornton that the transfer problem was first subject to elaborate analysis. Thornton, as pointed out above, subscribed both to the Wicksellian and the classical theories. He considered, however, the former to be true only in the long run. He was attacked by Wheatley and Ricardo, who insisted that even in the short run there was no reason to expect a transfer to cause an outflow of gold from the paying country, a fall in its prices and a shift of the term of trade against it. Thereby they came near to the Wicksellian theory of transfer. Ricardo was attacked by Malthus, who stood firmly for the classical theory.
In the first half of the 19th century the problem of Irish absenteeism received much discussion in Ireland and England. It had been said tht “as much as one-third of the entire produce of Ireland was sent out of the country in payment of rents to absentee proprietors”. Naturally people were very much concerned about the question whether the large payments made to the absentee proprietors would be economically disadvantageous to Ireland or not. The vulgar writers thought that the income of the absentees was entirely drawn in specie and that the payment meant the outflow of money or "the Measure of all Commerce, a certain Quantity thereof is necessary, for the carrying in the Trade of each country, in Proportion to the Business thereof".[2] Thus the outflow of gold that ensued would discourage commerce and lead to unemployment or to a fall in wages in Ireland. That view was attacked by M'Culloch. In his evidence before the Committee on the state of Ireland, M'Culloch, in answering the question whether the population of Ireland would be benefited by the expenditure among them of a certain portion of the rent which would have been remitted to England if the proprietor had been absent, said:ㅡ
Another criticism of the classical theory of transfer was raised by Nicholson.[2] Nicholson was of the opinion that the solution given by the classical economists, even upon the simplifying assumptions was merely a possible one, but "not the only one or the most probable". Nicholson offered an alternative explanation that was similar to the explanation given by Bastable. He first examined the case "that owing to great natural discoveriesㅡe.g. of mineral oilㅡEngland is able to add a considerable amount to its exports to other gold-standard countries, e.g. to France". The mechanism of adjustment described by Nicholson was as follows:ㅡ
Before the Great War, the most famous indemnity was that imposed upon France by the Treaty of Frankfort, in 1871. The discussions connecting with that indemnity [3] are also very interesting. Then came the Great War, the economic conditions of which induced a renewal of theoretical speculations upon the problem of transfer.
2. The Earlier Controversy: Taussig, Wicksell, and Viner (p. 279)
The new discussion was opened by Professor Taussig. In a paper published in 1917,[4] Professor Taussig analysed the transfer mechanism both under an international gold standard and under a paper standard. His analysis was substantially the same as that of Mill. Taussig recognized, however, that a loan might increase the demand of the borrowing country for foreign goods. Should the borrowers use the money or credit put at their disposal in buying once for all the goods produced by the lending country, there would be "no remittance at all"; and foreign exchanges, prices of the two countries or the barter terms of trade would not be affected.[1] But that was, to Taussig, a highly improbable and extremely rare case. Normally, a great part of the funds borrowed would be spent at home on domestic goods and services. In the latter case Hume's law would work to restore equilibrium in the balance of payments.
In spite of all those differences between a case under gold and a case under paper, there was one fundamental similarity in the outcome, viz. that the barter terms of trade turned against the lending country and its consumer were worse off. The barter terms of trade were unfavourable to the lending country because, while its export prices remained unchanged, its import prices became higher. Its consumers were worse off because they bought dearer imported goods with the same money incomes.
Taussig's original article was criticized by both Wicksell[1] and Hollander.[2] The main argument put forward by them is similar to that of Bastable and Nicholson. Wicksell's view has been given in an earlier chapter above and need not detain us. Nor is anything to be gained from a detailed consideration of Hollander's view, because he presented nothing which was really new.
To the criticism of Wicksell and Hollander we may add another criticism. Professor Taussig started with the assumption that the quantity of paper money was fixed in both countries. He also tacitly assumed that the banks in the borrowing country did not expand their credit as a result of an increase in their foreign assets. The more reasonable assumption seems to be that of an increase in the quantity of the circulating medium in the borrowing country, which may or may not be accompanied by a contraction of currency in the lending country. Upon the latter assumption the difficulty in the making of a transfer becomes much smaller, and the exchange rate of the American dollar becomes lower than that expected by Professor Taussig.
The Taussig-Wicksell controversy was reviewed by Professor Jacob Viner. Viner agreed with Wicksell in that the use of the proceeds by the borrowing country in the purchase of its domestic goods would also operate to adjust the international balance since that purchase would reduce the amount of commodities in the borrowing country available for export. "Nevertheless," he said, "even with this correction, Taussig's argument still holds that without gold movements and changes in price levels there is no visible mechanism whereby increased purchases by the borrowers of foreign commodities, and of those domestic commodities which otherwise would be exported, will exactly equal the amount of the borrowings."[3] The mechanism as described by the classical economists remained an indispensable means of adjustment in the balancing of international accounts. He then attempted to verify the classical doctrine by a study of pre-War Canadian balance of international indebtedness. He came to the conclusion that the evidence supplied by the pertinent statistical data of Canada's borrowing, trade, and price movements did give an inductive proof of the explanation given by the classical economists.
He was of the opinion, however, that the analysis must be extended beyond a general and unqualified discussion of changes in "general price levels". He followed the examples of Cairnes and particularly of Taussig in analysing the trends of what he called "the sectional price levels". Like Taussig, Viner began by distinguishing "domestic", "import", and "export" price level. He then investigated what would be the effects of international capital inflow on those price levels. He found from Canadian experience that prices in general rose so much "that the rise in the prices of domestic commodities was most marked, that the prices of import commodities, which was lest subject to the influence of domestic conditions, rose least, and that the rise in the prices of export commodities, which are subject to both internal and external influence, was intermediate between the rise in import prices and the rise in domestic prices." [1] As domestic prices rose relative import prices, imports were stimulated. As the same time, exports were checked by two factors: First, labour would be withdrawn from industries producing for export to the development of the enterprises for which the foreign capital was borrowed. Secondly, exports being governed by the conditions of the world market the rise of their prices in any one country would decrease the volume of its exports considerably. [2]
3. The Reparation Discussions: The Controversy between Keynes and Ohlin (p. 284)
The transfer problem was also much discussed during the period of post-War adjustment in connection with the Reparations Payments. Opinions may again be divided into two groups, viz. the classical doctrine and the Wicksellian doctrine.
Assuming sound currency and acting industry in Germany (which was the essential pre-condition), the process of payment was as follows: "The first financial step ... would be taxation of the German people, with the accumulation of bank balances in Germany to the credit of the German Government as a result of the tax receipts. The second step would be the transfer by the German Government of the right to draw against these bank balances to the French Government, to the Belgian Government, and to other countries to whom she owes indemnities. The third step would be the sale by these creditor countries of these German balances in the foreign exchange markets to whatever buyers appeared. The buyers of these balances in German banks would be those who had remittances to make to Germany, and these buyers would be primarily purchasers of German goods in every part of the world." The problem, however, is why and how there would be enough buyers to absorb those German balances to the amounts that the indemnity involved. To that Mr. Anderson gave the following answer:ㅡ
Wicksellian theory of transfer, on the contrary, denies the shift of the barter terms of trade in favour of the receiving country as a necessary consequence of transfer. According to the Wicksellian doctrine, when a payment to foreigners is not accompanied by an equivalent receipt, the aggregate expenditures or outlays of the country are greater than its aggregate receipts or incomes. The necessary consequence is for those citizens whose incomes are less than their expenditures to contract their expenditures so Equilibrium in the balance of payments is thus restored without any shift in the barter term of trade.
The difference between those two theories of transfer may be explained also by the difference in the assumptions regarding the demand conditions in the countries between which the transfer is made.[:]
- The classical economists seem to have made the assumption, at least implicitly, that the demand curves are given and remain unchanged when the transfer is made. Upon that assumption, as pointed out by Dr. Iversen, “an increase or decrease in the imports and exports of either country must be accompanied by movements in their prices along these given demand curves. And as an international capital movement means a change in the relation between exports and imports (or other current credit and debit items) in both countries, the conclusion ... that it must also be accompanied by a shift in their relative price levels, seems inevitable; to create the necessary export surplus the new lending country is forced to offer its goods at cheaper terms.” [1]
- The advocates of the Wicksellian theory of transfer, on the contrary, question the legitimacy of making that assumption. Their argument may be given in the words of Professor Robbins:ㅡ
The fact that a loan is raised for abroad, or that reparation taxes are paid, deprives domestic payers of spending power. Some of this spending power would be spent on imports. The situation is, therefore, to that extent automatically eased. ... It is a fundamental error to assume that the conditions of demand for export are unaffected by the fact that transfer is to be made. It is not merely a matter of the shape of the demand curve. It is a question of the movement of the demand curve as a whole. If I lend a man ￡100 out of a fixed income that means that immediately my demand curves are moved to the leftㅡat any price I demand lessㅡwhile his demand curves are pushed to the rightㅡat any price, he demands more. [1]
[1] L. Robbins, "Notes on Some Arguments for Protection" (^Economica^ 1931,) p. 61; cf. Harry D. White, ^The French International Accounts^ (1933), pp.17-18.That shift in the demand curves is sometimes sufficient to increase the exports and to decrease the imports of the paying country to an extent that the payments to be made are actually transferred in the form of commodities, without any shift in the price levels.
Both doctrines of transfer have, as shown above, a long development. It was in the hands of Thornton that the transfer problem was first subject to elaborate analysis. Thornton, as pointed out above, subscribed both to the Wicksellian and the classical theories. He considered, however, the former to be true only in the long run. He was attacked by Wheatley and Ricardo, who insisted that even in the short run there was no reason to expect a transfer to cause an outflow of gold from the paying country, a fall in its prices and a shift of the term of trade against it. Thereby they came near to the Wicksellian theory of transfer. Ricardo was attacked by Malthus, who stood firmly for the classical theory.
In the first half of the 19th century the problem of Irish absenteeism received much discussion in Ireland and England. It had been said tht “as much as one-third of the entire produce of Ireland was sent out of the country in payment of rents to absentee proprietors”. Naturally people were very much concerned about the question whether the large payments made to the absentee proprietors would be economically disadvantageous to Ireland or not. The vulgar writers thought that the income of the absentees was entirely drawn in specie and that the payment meant the outflow of money or "the Measure of all Commerce, a certain Quantity thereof is necessary, for the carrying in the Trade of each country, in Proportion to the Business thereof".[2] Thus the outflow of gold that ensued would discourage commerce and lead to unemployment or to a fall in wages in Ireland. That view was attacked by M'Culloch. In his evidence before the Committee on the state of Ireland, M'Culloch, in answering the question whether the population of Ireland would be benefited by the expenditure among them of a certain portion of the rent which would have been remitted to England if the proprietor had been absent, said:ㅡ
No, I do not see how it would be benefited in the least. If you have a certain value laid out against Irish commodities in the one case, you will have a certain value laid out against them in the other. The cattle are either exported to England, or they stay at home. If they are exported, the landord will obtain an equivalent for them in English commodities; if they are not, he will obtain in equivalent for them in Irish commodities; so that in both cases the landlord lives on the cattle, or on the value of the cattle: and whether he lives in Ireland or in England, there is obviously just the same amount of commodities for the people of Ireland to subsist upon.[1]
[1] Report from the Select Committee of the State of Ireland, London, 1825, p. 814.It followed that wages in Ireland would not be affected,[2] or, in other words, the factorial term of trade would not be altered as a result of the payment of rent to the absentee proprietors. M'Culloch's reasoning is based upon the assumption that when the payment is made there will be such a shift in the demand curve of the countries, between which the transfer is made, that the payment is actually transferred in the form of commodities without any movement of gold. For he considered as undoubtedly true that “in every instance, in which a demand arises for a bill of exchange to remit rents, it is, in point of fact, a demand for exportation of Irish produce, that would not otherwise have existed”. If the demand for the exchanges was one million pounds, the increased demand for exports would also be one million pounds.[3] Since the exports of Ireland were increased, there would be the same quantity of labourers employed on the whole, as if the landlord resided upon his own estate and spent his income upon it. A similar theory was advanced by Senior. Senior's reasoning also started with the assumption that the payment would not lead to any outflow of gold.[1] [:]
- He found that M'Culloch's theory was correct in case a country did not export raw material or, to put the same thing in other words, in case the country did not export anything other than the products of labour. In that case the number of labourers employed would remain unaltered and the wages of labour would not be affected.[2]
- But M'Culloch's theory would not be correct if Ireland was exporting raw produce, i.e. produce of land and not produce of labour. In that case, wages in Ireland and consequently the factorial term of trade would be affected:ㅡ
In a country which exports raw produce, wages may be lowered by such non-residence. If an Irish landlord resides on his estate, he required the services of certain persons who must also be resident there to minister his daily wants. He must have servants, gardeners, and perhaps gamekeepers... A portion of his land or, what comes to the same thing, a portion of his rent, must be employed in producing food, clothing, and shelter for all these persons, and for those who produce that food, clothing, and shelter. If he were to remove to England, all these wants would be supplied by Englishmen. The land and capital which was formerly employed in producing corn and cattle to be exported to England to provide the subsistence of English labourers. The whole quantity of commodities appropriated to the use of Irish labourers would be diminished, and that appropriated to the use of English labourers increased, and wages would, consequently, rise in England and fall in Ireland. [3]
[1] N.W. Senior, Three Lectures on the Rate of Wages, London, 1830, pp.28f. "It is impossible that he [the absentee owner] could receive his rent in money unless he chose to suffer a gratuitous loss. the rate of exchange between London and Paris is generally rather in favour of London, and scarcely even so deviates from par between any two countries, as to cover the expense of transferring the precious metals from the one to the other, excepting between the countries which do and those which do not possess mines."The theory advanced by M'Culloch and Senior, which is very near to the Wicksellian theory of transfer, was criticized by Longfield and Stuart Mill. Both Longfield and Mill showed that the making of a payment would have the same effect as an increase in the demand for foreign goods and consequently would lead to a shift in the barter terms of trade in favour of the receiving country and against the paying country. In other words they advanced the classical theory of transfer.[1]
[2] Ibid., p. 29
[3] Ibid., pp. 22 f.
[1] See S.M. Longfield, Three Lectures on Commerce and One on Absenteeism, Dublin, 1835, p. 81; and J.S. Mill, Essays on Some Unsettled Questions of Political Economy, London, 1844, p. 43. It is incorrect to say that either Longfield or Mill entirely neglected the relative shift in demands or buying powers as a factor contributing to the adjustment of international balances. Longfield noticed it but was of the opinion that it was insufficient to restore the equilibrium. He said: "A certain equilibrium exists between our average exports and imports. This is disturbed by the importation of corn. England suddenly demands a large quantity, perhaps six millions worth of corn. She may be ready to pay for them by her manufactures, but will those who sell it be willing to take those manufactures in exchange? Will the Prussian or Russian landowners, whose wealth has been suddenly increased, be content to expend his increased wealth in the purchase of an increased amount of English manufactures? We say that the contrary will take place, and the his habits will remain unchanged, and his increase of wealth will be spent in nearly the same manner as his former income, that is to say, not one fiftieth part in the purchase of English goods. His countrymen will, in the first instance, have the advantage of his increased expenditure. It will not be felt in England until after a long time, and passing through many channels. ... Thus the English have six millions less than usual to expend in the purchase of the commodities which they are accustomed to consume, while the inhabitants of the corn exporting countries have six millions more ... The commodities, therefore, which the Russians and Prussians consume, will rise in price, while those which the English use will undergo a reduction. But a very great proportion, much more than 19/20 of the commodities consumed in any country, are the productions of that country. English manufacturers will therefore fall, while Russian and Prussian goods will rise in price. The evil, after some time, works its own cure." Mill had also, in one occasion at least, recognized the relative shift in the buying power as a factor operating in the restoration of equilibrium. See Longfield, "Banking and Currency, Part I," Dublin University Magazine, 1840, p. 10; Mill, Principles of Political Economy Ashley's ed., pp. 623-5. We owe those two references to Professor Viner, See his Studies, pp. 297-301.Mill restated the classical theory in his Principles. The theory was then refined by the authors, whom we have described in Chapter V above. In 1854, as already indicated, the classical theory was criticized by Cairnes, who presented his version of the Wicksellian theory. In 1889, Mill's restatement was once more criticized, this time by Bastable.[2] Bastable doubted “whether Mill is correct in asserting that the quantity of money will be increased in the creditor [i.e. the receiving] and reduced in the debtor [i.e. the paying] country. ... Nor does it follow that the scale of prices will be higher in the creditor than in the debtor country.” The argument was as follows:ㅡ
Suppose that A owes ￡1,000,000 annually. This debt is a claim in the hands of B, which increases her purchasing power, being added to the amount of that power otherwise derived. To the extent that B's demand for foreign products ^through the use of exports^ is reduced by this application of her claim and the terms of exchange are thereby rendered more favourable to herㅡso far, and so far only, does A lose. It is plain that, under the actual conditions of trade, any effect of the kind must be insignificant. The fluctuations of the terms of international exchange are confined within comparatively narrow limits, owing to the competition of different countries and the enormous number of commodities dealt in; while, within those limits, the special force under consideration can have but little power. ... The sum of money incomes will no doubt be higher in the former [B]; but that increased amount may be expended in purchasing imported articles obtained by means of the obligations held against the debtor nation. ... The inhabitants of the former, having larger money incomes, will purchase more ^at the same price^, and thus bring about the necessary excess of imports over exports. [1]Furthermore, B might, wish to take from A new goods beyond the excess of A's exports over imports represented by the payment. In so far as that happened the terms of trade would be in A's favour.
Another criticism of the classical theory of transfer was raised by Nicholson.[2] Nicholson was of the opinion that the solution given by the classical economists, even upon the simplifying assumptions was merely a possible one, but "not the only one or the most probable". Nicholson offered an alternative explanation that was similar to the explanation given by Bastable. He first examined the case "that owing to great natural discoveriesㅡe.g. of mineral oilㅡEngland is able to add a considerable amount to its exports to other gold-standard countries, e.g. to France". The mechanism of adjustment described by Nicholson was as follows:ㅡ
The new oil may at once take the place of one or more particular old exports and the balance may remain as before. Suppose, however, that the foreign consumer purchase the oil with money entirely saved from things produced at home, e.g. French candles. This money being transferred to the English oil providers, they may demand particular French goods and so far an additional import is secured to balance the new export. Or they demand more English goods, in which case they consume the English goods (or their substitutes) formerly sent abroad, and their is a sufficient displacement of exports. [1]He next examined the case of a tribute. The mechanism of adjustment was given in the following passage:ㅡ
The government of the paying country must levy taxes to the amount of the annual tribute, and thereby will diminish the consuming power of the people by so much. Assume that ... actual money is taken from the pockets of the people. We may suppose that in consequence there will be partly a lessened demand for imports and partly an excess of home commodities available for export. At the same time the receiving counryㅡwhen the money is sent to itㅡwill have so much more to spend and can take more imports and also consume thing formerly exported. In this way an excess of exports from the paying country equivalent to the tribute can be brought about without any change in general prices.[2]The doctrine of adjustment of the balance of payments through changes in the demand schedules, as suggested by Cairnes, Bastable, Nicholson, and other economists, found one of its best presentations in Wicksell's ^Lectures^, which was published at the beginning of the present century. Wicksell's statement is so excellent that we have associated the doctrine with his name.
Before the Great War, the most famous indemnity was that imposed upon France by the Treaty of Frankfort, in 1871. The discussions connecting with that indemnity [3] are also very interesting. Then came the Great War, the economic conditions of which induced a renewal of theoretical speculations upon the problem of transfer.
2. The Earlier Controversy: Taussig, Wicksell, and Viner (p. 279)
The new discussion was opened by Professor Taussig. In a paper published in 1917,[4] Professor Taussig analysed the transfer mechanism both under an international gold standard and under a paper standard. His analysis was substantially the same as that of Mill. Taussig recognized, however, that a loan might increase the demand of the borrowing country for foreign goods. Should the borrowers use the money or credit put at their disposal in buying once for all the goods produced by the lending country, there would be "no remittance at all"; and foreign exchanges, prices of the two countries or the barter terms of trade would not be affected.[1] But that was, to Taussig, a highly improbable and extremely rare case. Normally, a great part of the funds borrowed would be spent at home on domestic goods and services. In the latter case Hume's law would work to restore equilibrium in the balance of payments.
[4] F.W. Taussig, "International Trade under Depreciated Paper: A Contribution to Theory," ^Quarterly Journal of Economics^, 1917, vol. xxxi, pp. 380-403.Professor Taussig went a step further in investigating the case of depreciated paper.[2] The conclusions he reached in that original essay were restated with great lucidity in his book on international trade.[3] In that book, he started with a case of two countries each of which had a ^fixed^ quantity of inconvertible paper currency. He first inquired what would be the equilibrium rate of exchange under such a case. He found that:ㅡ
In the absence of a common monetary standard, the rate of foreign exchange depends on the mere impact of the two quantities on hand at the moment [i.e. the impact of the monetary supply on the monetary demand].The price of foreign exchange ... depends at any given time on the respective volumes of remittances. It results from the ^impact^ of two forces that meet. The outcome is simply such as to equalize the remittances; such that the money value of the two, expressed in the currency of either country, is the same.[4]
[3] For Taussig's statement of the transfer mechanism under gold standard in his book. ^International Trade^, see pp. 108-140 of that book.He next inquired how changes in the conditions of the balance of payment were brought about under that case and compared it with the mechanism under an international gold standard. He took for illustration a sudden burst of loans from Great Britain to the United States. The payments which the former had to make were increased. The amounts of the new payments were exactly the same as the amount of the loan. "There is no more demand for sterling exchange than before; no more purchases of British goods are made than before, and no larger remittances have to be made to London." [1] In other words, Professor Taussig made the assumption underlying the whole classical doctrine of transfer, viz. that the transfer does not of itself create, for the receiving country, a greater demand for the goods and services of the paying country. Upon that assumption, there was clearly an enlarged demand for bills of exchange to be met by an unchanged supply. The price of the bills naturally rose sharply, since no money of one country could enter into the circulation of the other and the only means of remitting was by bills of exchange. Therein lies the first difference between the case of a dislocated exchange and that of a gold standard: "Under specie it is the foreign exchanges that never vary, barring the minor fluctuations within the gold points. Under paper, however, a new and different normal quotation for foreign exchange will be established." [2] Closely connected with that is another difference between the two cases: "Under specie the level of domestic prices in each country will be changed. ... But with dislocated exchanges, the level of domestic prices in each will remain as it was before." [3] Thus under specie the money income in both countries would change, while under paper it would not.[4] It followed that under paper the prices of exported goodsㅡthough during the stage of readjustment (during the lag) somewhat lower than before in the borrowing country and higher in the lending countryㅡwould ultimately return to their former level, because they followed in the long run the course of domestic prices. Under specie, on the other hand, exported prices, like the domestic prices, would fall in the lending country and rise in the borrowing country.[5] Only in regard to the prices of imported goods would there be the same result under paper as under specie, i.e. they would be permanently cheaper in the lending country than before.[6] It was necessarily so because only through that change in the relative prices of imported articles could more goods move from the lending to the borrowing countries, and lending was paid in commodities. Taken as a whole, the position of the borrowing nation would, in the case of inconvertible paper, be as follows:ㅡ
[4] Ibid., pp. 345, 367; p. 344.
The index number will register during the period of readjustment a fall in prices. Imported goods will be cheaper as the immediate consequence of the new rate of foreign exchange. Exported goods also will be cheaper. Domestic goods will be unchanged. The general price level will thus be shown by the index to be lower. As times goes on the exported goods will no longer show a fall in price, i.e. the initial fall will be succeeded by a rebound to the original figures. Their producers will be led to lessen supplies in such a way that the returns to them will be as great as to the other domestic producers. But the imported goods will have fallen in price definitively. When all has settled down the general price level ... will be lower than it was before the disturbing influence set in, domestic prices (including those of exported goods) being the same as before but the prices of imported goods lower. [1]The opposite was true of the lending nation. To sum up, the mechanism described by him has the following sequential order of events:ㅡ
The remittances [due to a sudden burst of loans] first set in; then exchanges are affected; the prices shift; at last the imports and exports of goods are modified. [2]A similar result would be obtained if the initiating cause of disturbance was an altered state of demand for trading commodities,[3] or a change of their supply.[4]
In spite of all those differences between a case under gold and a case under paper, there was one fundamental similarity in the outcome, viz. that the barter terms of trade turned against the lending country and its consumer were worse off. The barter terms of trade were unfavourable to the lending country because, while its export prices remained unchanged, its import prices became higher. Its consumers were worse off because they bought dearer imported goods with the same money incomes.
Taussig's original article was criticized by both Wicksell[1] and Hollander.[2] The main argument put forward by them is similar to that of Bastable and Nicholson. Wicksell's view has been given in an earlier chapter above and need not detain us. Nor is anything to be gained from a detailed consideration of Hollander's view, because he presented nothing which was really new.
To the criticism of Wicksell and Hollander we may add another criticism. Professor Taussig started with the assumption that the quantity of paper money was fixed in both countries. He also tacitly assumed that the banks in the borrowing country did not expand their credit as a result of an increase in their foreign assets. The more reasonable assumption seems to be that of an increase in the quantity of the circulating medium in the borrowing country, which may or may not be accompanied by a contraction of currency in the lending country. Upon the latter assumption the difficulty in the making of a transfer becomes much smaller, and the exchange rate of the American dollar becomes lower than that expected by Professor Taussig.
The Taussig-Wicksell controversy was reviewed by Professor Jacob Viner. Viner agreed with Wicksell in that the use of the proceeds by the borrowing country in the purchase of its domestic goods would also operate to adjust the international balance since that purchase would reduce the amount of commodities in the borrowing country available for export. "Nevertheless," he said, "even with this correction, Taussig's argument still holds that without gold movements and changes in price levels there is no visible mechanism whereby increased purchases by the borrowers of foreign commodities, and of those domestic commodities which otherwise would be exported, will exactly equal the amount of the borrowings."[3] The mechanism as described by the classical economists remained an indispensable means of adjustment in the balancing of international accounts. He then attempted to verify the classical doctrine by a study of pre-War Canadian balance of international indebtedness. He came to the conclusion that the evidence supplied by the pertinent statistical data of Canada's borrowing, trade, and price movements did give an inductive proof of the explanation given by the classical economists.
He was of the opinion, however, that the analysis must be extended beyond a general and unqualified discussion of changes in "general price levels". He followed the examples of Cairnes and particularly of Taussig in analysing the trends of what he called "the sectional price levels". Like Taussig, Viner began by distinguishing "domestic", "import", and "export" price level. He then investigated what would be the effects of international capital inflow on those price levels. He found from Canadian experience that prices in general rose so much "that the rise in the prices of domestic commodities was most marked, that the prices of import commodities, which was lest subject to the influence of domestic conditions, rose least, and that the rise in the prices of export commodities, which are subject to both internal and external influence, was intermediate between the rise in import prices and the rise in domestic prices." [1] As domestic prices rose relative import prices, imports were stimulated. As the same time, exports were checked by two factors: First, labour would be withdrawn from industries producing for export to the development of the enterprises for which the foreign capital was borrowed. Secondly, exports being governed by the conditions of the world market the rise of their prices in any one country would decrease the volume of its exports considerably. [2]
3. The Reparation Discussions: The Controversy between Keynes and Ohlin (p. 284)
The transfer problem was also much discussed during the period of post-War adjustment in connection with the Reparations Payments. Opinions may again be divided into two groups, viz. the classical doctrine and the Wicksellian doctrine.
- Mr. Keynes[3] and Professor Taussig[4] were the most important champions of the former view.
- Unlike them, Dr. Anderson[1] explained the transfer of reparations along the lines of Wicksellian doctrine. [?:]
[3] J.M. Keyns, ^The Economic Consequences of the Peace^, London, 1919; ^A Revision of the Treaty^, London, 1922.
[4] F.W. Taussig, "Germany's Reparation Payments," ^S.E.R^ Supplement, 1920
Assuming sound currency and acting industry in Germany (which was the essential pre-condition), the process of payment was as follows: "The first financial step ... would be taxation of the German people, with the accumulation of bank balances in Germany to the credit of the German Government as a result of the tax receipts. The second step would be the transfer by the German Government of the right to draw against these bank balances to the French Government, to the Belgian Government, and to other countries to whom she owes indemnities. The third step would be the sale by these creditor countries of these German balances in the foreign exchange markets to whatever buyers appeared. The buyers of these balances in German banks would be those who had remittances to make to Germany, and these buyers would be primarily purchasers of German goods in every part of the world." The problem, however, is why and how there would be enough buyers to absorb those German balances to the amounts that the indemnity involved. To that Mr. Anderson gave the following answer:ㅡ
[1] B.M. Anderson, "Procedure in Paying the German indemnity," ^The Chase Economic Bulletin^, 1921.
In the first place, the taxation in Germany would reduce the buying power of the German people to such an extent that they could not consume at home the whole products of their country. As the Government reduced their incomes by taxation their ability to consume would be reduced. Secondly, the offering of large quantities of mark exchange in the foreign exchange markets of the world would tend to lower its value, and so make German goods a little cheaper than they otherwise would be when priced in dollars, francs, pesos, or yen. On the other hand, the buying power of the outside world would be increased by the same process. [2]
That is probably the first application of the Wicksellian doctrine to the German reparation problem.
There were many other writings on the reparation problem. It is, however, impossible for us in this general survey to examine all of them.[3] We propose to go directly to the controversy between Mr. Keynes and Professor Ohlin regarding the payment of German reparations.
In an article on the German transfer problem,[1] Mr. Keynes presents once more the classical doctrine of transfer. His statement is substantially the same as that which Taussig presented in an article in 1917.
Since the solution of the Transfer Problem does not come about, in the main, by the release to foreign consumers of part of the exportable goods now consumed by Germans and their abstention from buying part of the imported goods, the solution must come about "by the diversion of German factors of production from other employments into the export industries." [3] That diversion is possible only when the export industries can sell an increased output. "They cannot sell an increased output at a profit unless they can first reduce their costs of production." There are three ways of bringing that about:ㅡ
A reduction in the money wages, however, does not always help her and sometimes may even injure her. That is true of the following cases:ㅡ
There are, however, three points in which Mr. Keynes departs from the classical approach to the problem of transfer. First he assumes the economic structures of the commercial world to be inflexible. He says:ㅡ
My own view is that at a given time the economic structure of a country, in relation to the economic structures of its neighbours, permits of a certain "natural" level of exports, and that arbitrarily to effect a material alteration of this level by deliberate devices is extremely difficult.[2]
That is obviously not "classical", because the classical economists assumed the cost and price structures to be flexible and the elasticity of demand to be greater than unity. Second, he asserts that some items in the international accounts other than the commodity items are more important in the adjustment of disturbance:ㅡ
When Mr. Keynes comes back to the problem of adjustment of disturbances in the balance of payments in his general treatise on money,[3] he is contributing to the general theory and no longer confines himself to the particular case of German Reparation payments. There he takes his position on the classical doctrine.
Before going into his theory it is desirable for us to explain some of the symbols employed by him: In his book [,]
The direct weapon that the Central Bank can use in regulating external disequilibrium is the bank rate. But to employ the bank rate as a weapon to meet external disequilibrium would, for a time, mean a divergence of the terms of credit from their domestic equilibrium level, if they are originally in equilibrium. Hence the first effect of using bank rate to preserve external equilibrium will be to produce internal disequilibrium.[3] That, however, is true only of a transitional period. When the change in bank rate has worked out its effect via prices on B so as to bring about a stable equilibrium between L and B, the internal equilibrium will once again be restored. Thus he says:ㅡ
As indicated above, the fulfilment of the condition of external equilibrium depends on two things: first, relative price-levels which affect B; and, second, relative interest rates which affect L. External disequilibrium may thus arise either from disequilibrium in relative price-levels or from disequilibrium in relative interest rates. He finds that there is a radical difference between those two cases. "In the first case, the disequilibrium can be cured bu a change in price-levels (or, rather, of income-levels) without any permanent change in interest rates, though a temporary change in interest-rates will be necessary as a means of bringing about the change in income-levels. In the second case, on the other hand, the restoration of equilibrium may require not only a change in interest-rates, but also a lasing change in income-levels (and probably in price-levels). That is to say, a country's price level and income-level are affected not only by changes in the price-level abroad, but also by changes in the interest rate, due to a change in the demand for investment abroad relatively to the demand at home" [1]
Mr. Keynes's original article are criticized by Professor Ohlin.[2] Professor Ohlin finds Mr. Keynes's main thesis to be erroneous. "This erroneous conclusion is reached because of the fact that the shist in buying power is ignored, except in so far as it ^directly^ affects demand for international goods." [3] Professor Ohlin is of the opinion that the shift in buying power consequent on a payment of reparation or an international loan affects both directly and indireclty the demand for international goods. Its direct effect in increasing the borrowers' demand for foreign goods and reducing the lenders' may not be important. But it has an indirect effect: It increases the demand for home market goods in the borrowing country. That increased demand for home market goods "will lead to an increased output of these goods. In a progressive country this means that labour and capital, that would otherwise have passed to export industries and industries producing goods which compete directly with import goods, now go to the home market industries instead. Output of thee import-competing and of export goods increases less than it would otherwise have done. Thus, there is a relative decline in exports and an increase in imports and an excess of imports is created". A corresponding adjustment takes place in the lending country and an excess of its exports is created. As the shift in purchasing power indirectly affects the demands for foreign goods, it also occasions changes in the sectional price levels. Home market prices tend to rise in relative to prices of exports and import goods and prices of the goods which compete with imported goods. But it is not necessary, accoding to Professor Ohlin, that the borrowing country's ^export^ prices should rise and the lending country's fall. [2] In other words, there is no reason to suppose, as Mr. Keynes did, that the barter terms of trade must turn against the paying country. [3]
Professor Ohlin restates his theory of transfer in his book on international trade. [4] He starts with the case of demand variation and investigates the possible effects of an increase of B's demand for some of A's goods. A and B being two trading regions. The first effect which he finds is on the distribution of buying power, which is equal to "total gross income, increased by borrowings and reduced by loans, and expressed in terms of money with reference to a ^period^ of time". The total buying power of the two regions being constant, A will have, as a result of the change in demand, a greater buying power and B a smaller one than before. That alteration in buying power means a corresponding shift in the demand curves. A demands more of B's goods so that "the balance of trade is automatically kept in equilibrium". The second effect is that on the scarcity of A's factors in relation to the scarcity of B's factors. As the demand for A's export goods increases the relative scarcity of the factors required for the production of those goods, and consequently the relative scarcity of all A's factors regarded as a group is increased. That leads us immediately to the third effect, viz. "if the total money value of the product of both regions is kept constant, A will get a higher, B a lower money income than before", and the fourth effect, viz. "if the price level for factors in general in A and B taken together is kept constant, the level of A factors rises and that of B factors drops". Since prices of factors entering into the export industries in A rise relative to B one should expectㅡthe fifth effectㅡthat prices of A's export goods and goods using factors of the same sort as the export goods will also rise relative to B. That means the movement of the terms of trade in favour of A. [1] That shift in the terms of trade is, however, not the same as the shift postulated by the classical economists. The former i purely the result of the ^original^ change in the demand data, while the latter is a part of the process of adjustment.
( ... p. 293
There were many other writings on the reparation problem. It is, however, impossible for us in this general survey to examine all of them.[3] We propose to go directly to the controversy between Mr. Keynes and Professor Ohlin regarding the payment of German reparations.
In an article on the German transfer problem,[1] Mr. Keynes presents once more the classical doctrine of transfer. His statement is substantially the same as that which Taussig presented in an article in 1917.
[1] J.M. Keynes, "The German Transfer Problem," ^E.J.^, 1929It is untrue to say that Mr. Keynes ignored the fact that the demand schedules might shift as a result of a payment of reparation. He clearly says:ㅡ
Let us suppose that the German factors of production produces nothing but exports and consumes nothing but imports, in this case it is evident that there is ... no Transfer Problem ... If ￡1 is taken from you and given to me and I choose to increase my consumption of precisely the same goods as those of which you are compelled to diminish yours, there is no Transfer Problem.[2]He recognizes the balance of trade would adjust itself to the making of a reparation payment "to the extent that high taxation causes German consumers to buy less foreign goods". What he insists on is that "only a proportion of their abstention from consuming will be in respect of foreign goods" and that is not, especially in the case under examination, a very large proportion. For that reason he turns to the classical doctrine of transfer.
Since the solution of the Transfer Problem does not come about, in the main, by the release to foreign consumers of part of the exportable goods now consumed by Germans and their abstention from buying part of the imported goods, the solution must come about "by the diversion of German factors of production from other employments into the export industries." [3] That diversion is possible only when the export industries can sell an increased output. "They cannot sell an increased output at a profit unless they can first reduce their costs of production." There are three ways of bringing that about:ㅡ
Either German industrialists must increase their efficiency faster than industrialists elsewhere; or the rate of interest in Germany must be lower than elsewhere; or the gold-rates of efficiency-wages must be reduced compared with elsewhere.[4]To him, only the last way, i.e. the reduction of money wages, is important in the case under consideration. It follows that the Transfer Problem required a fall of German money-wages relative to other countries, a reduction of German export prices and a shift of barter terms of trade against her.
A reduction in the money wages, however, does not always help her and sometimes may even injure her. That is true of the following cases:ㅡ
(ⅰ) When the output, e.g. personal services or buildings, cannot be exported anyhow;"Moreover," he says, "if a reduction in price of 10% stimulates the volume of trade by 20%, this does not increase the value of the exports by 20%, but only 8% (1.20×90＝108)."
(ⅱ) When the world's demand for Germany's goods has an elasticity of less than unity, i.e. where a reduction in price stimulates demand less than in proportion, so that the greater quantity sells for a less aggregate sum;
(ⅲ) Where Germay's foreign competitors fight to retain their present trade connections by reducing their own rates of wages ^pari passu^;
(ⅳ) Where Germany's foreign customers, reluctant to allow this more intensive competition with their home products, meet it by raising their tariff. [1]
There are, however, three points in which Mr. Keynes departs from the classical approach to the problem of transfer. First he assumes the economic structures of the commercial world to be inflexible. He says:ㅡ
My own view is that at a given time the economic structure of a country, in relation to the economic structures of its neighbours, permits of a certain "natural" level of exports, and that arbitrarily to effect a material alteration of this level by deliberate devices is extremely difficult.[2]
That is obviously not "classical", because the classical economists assumed the cost and price structures to be flexible and the elasticity of demand to be greater than unity. Second, he asserts that some items in the international accounts other than the commodity items are more important in the adjustment of disturbance:ㅡ
Historically, the volume of foreign investment has tended, I think, to adjust itselfㅡat least to a certain extentㅡto the balance of trade, rather than the other way round, the former being the sensitive and the latter the insensitive factor. [3]The classical economists, on the contrary, assumed the balance of trade to adjust itself to the volume of foreign investment. Third, in one of his rejoinders, he calls attention to a new problem, which was perhaps tacitly raised in his original paper. That problem is, how is the payment first transferred in ^monetary^ form? It is only when payment can first be transferred in the form of money and credit that the transfer can have any effect on the demand conditions. "If Germany was in a position to export large quantities of gold of if foreign balances in Germany were acceptable to foreign Central Banks as a substitute for gold in their reserves, then it would ... help the situation by changing demand conditions." [1] But what Germany could do along those lines would be, according to Mr. Keynes, quite negligible. For that reason Germany could only make the monetary transfer "if she has already sold the necessary exports"; so that the monetary transfer itself "cannot be part of the mechanism which is to establish the situation which will permit her to sell the exports". [2] Thus it is possible, at least in the case under consideration, that transfer in the form of commodities should precede monetary transfer. The traditional approach to the problem, on the contrary, always assumes an approach the other way round and takes the problem of monetary transfer for granted.
When Mr. Keynes comes back to the problem of adjustment of disturbances in the balance of payments in his general treatise on money,[3] he is contributing to the general theory and no longer confines himself to the particular case of German Reparation payments. There he takes his position on the classical doctrine.
Before going into his theory it is desirable for us to explain some of the symbols employed by him: In his book [,]
- B＝the Foreign Balance＝“the balance of trade on income account, resulting from the excess of the value of home-owned output of goods and services (other than gold), whether produced at home or abroad, placed at the use and disposal of foreigners, over the value of the corresponding foreign-owned output placed at our use and disposal,”
- L＝the values of Foreign Lending＝“the unfavourable balance of transactions on capital account, i.e. the excess of the amount of our own money put at the disposal of foreigners through the net purchase by our nationals of investments situated abroad, over the corresponding amount expended by foreigners on the purchase of our investments situated at home” ;
- G＝the exports of gold.
- Thus the existence of external equilibrium depends upon the factors governing L and those governing B.
- He finds that the former are the relative interest rates at home and abroad, while the latter are the relative price-levels at home and abroad of the goods and services which enter into international trade.
- But “there is no direct or automatic connection between these two things; nor has a Central Bank any direct means of altering relative price-levels, The weapon of a Central Bank consists in the power to alter interest rates and the terms of lending generally.” [2]
The direct weapon that the Central Bank can use in regulating external disequilibrium is the bank rate. But to employ the bank rate as a weapon to meet external disequilibrium would, for a time, mean a divergence of the terms of credit from their domestic equilibrium level, if they are originally in equilibrium. Hence the first effect of using bank rate to preserve external equilibrium will be to produce internal disequilibrium.[3] That, however, is true only of a transitional period. When the change in bank rate has worked out its effect via prices on B so as to bring about a stable equilibrium between L and B, the internal equilibrium will once again be restored. Thus he says:ㅡ
Bank-rate is both an expedient and a solution. It supplies both the temporary pick-me-up and the permanent cureㅡprovided we ignore the ^malaise^ which may intervene between the pick-me-up and the cure. ... The essence of the matter can be set out briefly. Raising the bank-rate obviously has the effect of diminishing L, and the net amount of lending to foreigners. But it has no direct influence in the direction of increasing B. On the other hand, just as the dearer money discourages foreign borrowers, so also it discourages borrowers for the purposes of home investmentㅡwith the result that the higher bank-rate diminishes ... the volume of home investment. Consequently total investment falls below current savings (assuming that there was previous equilibrium), so that prices and profits, and ultimately earnings, fall, which has the effect of increasing B, because it reduces the costs of production in terms of money relatively to the corresponding costs abroad. On both accounts, therefore, B and L are brought nearer together, until in the new position of equilibrium they are again equal. ... At the new level of equilibrium we shall once again have ... I＝S. But we shall also have B＝L. For since B moves in the opposite direction to P and P in the opposite direction to LㅡB [? L－B], whilst L moves in the opposite direction to the bank rate, for every value of bank-rate there is a value of P at which B＝L; and since S moves in the same direction as bank-rate and I moves in the opposite direction, there is always a value of bank-rate for which I＝S. Consequently there is always a pair of values of bank-rates and of P at which both I＝S and B＝L. [1]
[1] ^Treatise^, vol. i, pp. 214-5. I＝the value of increment of new investment goods. S＝the amount of saving.Mr. Keynes calls attention to the growing importance of the role of the international movement of liquid capital:ㅡ
In modern times, when large reserves are held by capitalists in a liquid form, comparatively small changes in the rate of interest in one centre relatively to the rate of others may swing a large volume of lending from one to the other. That is to say, the amount of foreign lending is highly sensitive to small changes. The amount of the foreign balance, on the other hand, is by no means so sensitive. ... This high degree of short-period mobility of international lending, combined with a low degree of short-period mobility of international trade, meansㅡfailing steps to deal with the formerㅡthat even a small and temporary divergence in the local rate of interest from the international rate may be dangerous.[2]When the bank rate is put up against an unfavourable balance of payments, the existence of capital in liquid form in the international market would cause the gap between L and B to be filled by the flow of short-term capital. That will quickly restore apparent equilibrium at a stage quite insufficient to work out its effect on B and to re-establish underlying equilibrium. The result is to delay the credit measures, while the progressive accumulation of short-term indebtedness becomes itself an independent threat to equilibrium.
As indicated above, the fulfilment of the condition of external equilibrium depends on two things: first, relative price-levels which affect B; and, second, relative interest rates which affect L. External disequilibrium may thus arise either from disequilibrium in relative price-levels or from disequilibrium in relative interest rates. He finds that there is a radical difference between those two cases. "In the first case, the disequilibrium can be cured bu a change in price-levels (or, rather, of income-levels) without any permanent change in interest rates, though a temporary change in interest-rates will be necessary as a means of bringing about the change in income-levels. In the second case, on the other hand, the restoration of equilibrium may require not only a change in interest-rates, but also a lasing change in income-levels (and probably in price-levels). That is to say, a country's price level and income-level are affected not only by changes in the price-level abroad, but also by changes in the interest rate, due to a change in the demand for investment abroad relatively to the demand at home" [1]
Mr. Keynes's original article are criticized by Professor Ohlin.[2] Professor Ohlin finds Mr. Keynes's main thesis to be erroneous. "This erroneous conclusion is reached because of the fact that the shist in buying power is ignored, except in so far as it ^directly^ affects demand for international goods." [3] Professor Ohlin is of the opinion that the shift in buying power consequent on a payment of reparation or an international loan affects both directly and indireclty the demand for international goods. Its direct effect in increasing the borrowers' demand for foreign goods and reducing the lenders' may not be important. But it has an indirect effect: It increases the demand for home market goods in the borrowing country. That increased demand for home market goods "will lead to an increased output of these goods. In a progressive country this means that labour and capital, that would otherwise have passed to export industries and industries producing goods which compete directly with import goods, now go to the home market industries instead. Output of thee import-competing and of export goods increases less than it would otherwise have done. Thus, there is a relative decline in exports and an increase in imports and an excess of imports is created". A corresponding adjustment takes place in the lending country and an excess of its exports is created. As the shift in purchasing power indirectly affects the demands for foreign goods, it also occasions changes in the sectional price levels. Home market prices tend to rise in relative to prices of exports and import goods and prices of the goods which compete with imported goods. But it is not necessary, accoding to Professor Ohlin, that the borrowing country's ^export^ prices should rise and the lending country's fall. [2] In other words, there is no reason to suppose, as Mr. Keynes did, that the barter terms of trade must turn against the paying country. [3]
Professor Ohlin restates his theory of transfer in his book on international trade. [4] He starts with the case of demand variation and investigates the possible effects of an increase of B's demand for some of A's goods. A and B being two trading regions. The first effect which he finds is on the distribution of buying power, which is equal to "total gross income, increased by borrowings and reduced by loans, and expressed in terms of money with reference to a ^period^ of time". The total buying power of the two regions being constant, A will have, as a result of the change in demand, a greater buying power and B a smaller one than before. That alteration in buying power means a corresponding shift in the demand curves. A demands more of B's goods so that "the balance of trade is automatically kept in equilibrium". The second effect is that on the scarcity of A's factors in relation to the scarcity of B's factors. As the demand for A's export goods increases the relative scarcity of the factors required for the production of those goods, and consequently the relative scarcity of all A's factors regarded as a group is increased. That leads us immediately to the third effect, viz. "if the total money value of the product of both regions is kept constant, A will get a higher, B a lower money income than before", and the fourth effect, viz. "if the price level for factors in general in A and B taken together is kept constant, the level of A factors rises and that of B factors drops". Since prices of factors entering into the export industries in A rise relative to B one should expectㅡthe fifth effectㅡthat prices of A's export goods and goods using factors of the same sort as the export goods will also rise relative to B. That means the movement of the terms of trade in favour of A. [1] That shift in the terms of trade is, however, not the same as the shift postulated by the classical economists. The former i purely the result of the ^original^ change in the demand data, while the latter is a part of the process of adjustment.
( ... p. 293
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