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COST DISINFLATION AND EXPORT EXPANSION
Author(s) -
KURIHARA KENNETH K.
Publication year - 1961
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/j.1467-6435.1961.tb02368.x
Subject(s) - disinflation , economics , balance of payments , balance of trade , monetary economics , capital good , price elasticity of demand , exchange rate , international economics , current account , macroeconomics , market economy , microeconomics , goods and services
SUMMARY This note is an attempt to offer a quantitatively significant answer to the question: How effective is cost disinflation likely to be in restoring a deficit country's balance of payments equilibrium? This question is occasioned by such recent structural changes in the world economy as to intensify cost‐price competition in international markets. In seeking the needed answer, the author has set up a system of equations to describe the relevant domestic and foreign variables affecting a trading nation's balance of payments–on plausible assumptions. The analysis made on the basis of that system leads to the following conclusions: 1. If a nation is not a marginal supplier of internationally tradeable goods, the price ‐elasticity of world demand for that nation's exports is likely to be so far below unity (trend value) as to worsen its balance of payments in consequence of a disinflation‐induced fall in its export price, given the constant exchange rates and the constant level of effective world demand. 2. If a nation's exports consist largely of capital goods and manufactures, the income ‐elasticity of world demand for that nation's exports is likely to exceed unity so as to aggravate its balance of payments difficulties during a period of falling effective world demand possibly set off by some other nation's disinflationary drive, cet. par. 3. If a nation's cost disinflation increases its innovational investment (designed to increase general productivity), its induced imports are likely to increase via the foreign‐trade multiplier and so to offset any beneficial effect that a disinflationinduced fall in the export price might have on its trade balance. 4. In sum, the analysis would make it theoretically unsound and practically unwise for any trading nation to place unilaterally excessive reliance on the price mechanism in general and disinflation in particular for balance of payments equilibrium–especially in this day and age of universal wage‐price rigidities, income sensibilities and exchange‐rate flexibilities.