** 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**