g references to ”an import restriction which brings about an improvement in the foreign trade balance” , (’’Devaluation Versus

In document The control of imports : Australia 1952-1960 (Page 87-91)

2 2 1 from L to the line D ’G* is equal to the distance from L ! to D'G' •

E. g references to ”an import restriction which brings about an improvement in the foreign trade balance” , (’’Devaluation Versus

Import Restriction ...” op.cit., p. 3 8 3 ) 5 it would also seem to be implied in Alexander’s inclusion of import controls within his group of ’’domestic measures calculated to change the relationship of absorption and income, and hence to affect the foreign balance”.

to consider the longer term effects of the use of import restrictions it excludes these factors. To the extent that it is intended to take these short term factors into account, his model has little relevance for the longer term since the parameters will have changed.

This does not, in the event, invalidate the nominal results of his model, though one could not be sure of this except by reworking the whole problem to take into account explicitly all the relevant factors, but it does invalidate the interpretation he places on these results. The reason his model turns out to be formally correct is that his method of deriving his results makes use of the "four elasticities”

1

approach of Joan Robinson, an approach which has been subjected to

2

considerable criticism.

The formulation in the Appendix to this chapter is in terms of partial elasticities which are conceivably measurable independently of the problem being considered; it also makes explicit the disabsorp- tion necessary within the country seeking to remove a balance of

payments deficit.

In order to make judgements in terms of welfare, for the purpose

1.

2.

op.cit.

Perhaps the most serious of the defects of the Mfour elasticities” approach is its use of a ’’total” elasticity concept. Alexander, himself, was highly critical of the total elasticity in his ’’Effects

of a Devaluation on.cit. . particularly p.264; Pearce has commented, "Such an elasticity is meaningless until its elements are specified”, arguing that such elasticities are not parameters which are independent of the problem, (on.cit. p.10). See also Letiche, on.cit.. pp.66-71/

84

of this exercise, it is assumed either that income distribution is always such that all individuals in the community have equal marginal utilities or that it is appropriate to attach a 'weight1 to each

individual's marginal utility such that with the current distribution of income, price p^ can be taken as a measure of the 'value' to the community of giving an increment of the i ^ good to any individual.^ It follows that the sum of price times the change in quantities of all commodities is a measure of the direction of the change in real income or welfare to the community. That is, if ip^dX^>C welfare

2

is increased; if £p dX <0 welfare is reduced, where p represents price, and X represents consumption of good^.

It will be seen from the Appendix that the difference in the welfare effects of the series of policies is given by the formula U(r) - U(E) where U(P.) represents the welfare loss associated with an

improvement in the balance of payments when import restrictions are used, and U(e), the welfare effect of an improvement in the balance

1.

This is essentially the method used by J.M.Fleming in his article "On Making the Best of Import Restrictions", Economic Journal. Vol. LXI, No. 241, (March 1947;; and constitutes the welfare basis for J.M.Meade's Trade and Welfare. Oxford, 1955« It will be apparent that this welfare criterion is less ambiguous than that used by Alexander - he himself notes that his method leads to the paradox­ ical position where, "a lower real income can have a higher welfare value". "Effects of Devaluation op.cit.. p.273.

2.

It is assumed that the changes in total welfare dX will be distri­ buted among individuals in amounts dx^ such that Xpo(24 = 0 for every individual. This is clearly possible and is really^a consequence of the assumptions made.

of payments when an exchange rate variation is used. The significant difference between the result for U(R) and U(E) is that the result for U(R) includes certain variables which are consequential upon the

difference between the foreign price and the domestic price, which are not present in the result for U(E) since there is no difference between the two prices. The result which is obtained indicates that as a method of redirecting expenditure from imports, import restric­ tions are only preferable to an exchange rate variation up to the point equivalent to the optimum tariff; once that point has been passed it is preferable to vary the exchange rate.

The equations U(R) and U(E) consist of two parts, the loss of welfare due to the change in the amount of goods traded and the quantity of imports multiplied by the change in the real terms of trade due to the tariff element. It is clear that there is only one balance of payments equilibrium, i.e, long term equilibrium for each level of import restrictions, including a zero level of restriction. It is also clear that to ask whether an improvement in the balance of payments is best sought by an exchange rate variation or by import restrictions is more meaningful when the question is phrased in the formi- ’what is the best level of import restriction?’ It can be seen both from the model in the Appendix and from Alexander’s model that this is basically the question being answered, since in both cases the result is that welfare can be increased by imposing import restric. tions up to the point of the optimum tariff but beyond that point it

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p a y s , i n te rm s o f w e lf a r e , n o t to i n c r e a s e im port r e s t r i c t i o n s .

T h is i s th e same as t h e optimum t a r i f f c o n c lu s io n as su ch , s in c e ,

i t w i l l alw ays be t o t h e b e n e f i t o f a c o u n try , i f i t s e x i s t i n g t a r i f f s

o r q u a n t i t a t i v e r e s t r i c t i o n s a r e below th e l e v e l o f th e optimum

t a r i f f , t o in c r e a s e th e s e r e s t r i c t i o n s up t o th e optimum p o i n t .

In document The control of imports : Australia 1952-1960 (Page 87-91)