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指导英国课程作业DP4208M: INTERNATIONAL MONETARY ECONOMICS
Lecture 2 - Balance of Payments Policies: The Traditional Approach
1. The balance of payments as a policy problem
The BOP was seen by governments as a potential policy problem, with some form of intervention expected, in view of the ineffectiveness or undesirability of automatic adjustments mechanisms. The question facing governments was to what degree these should be implemented and what policies were to be chosen.
1.1 AN OPEN ECONOMY IDENTITY
The ‘Keynesian’ identity for national income in an open economy is as follows: Y = C + I + G + (X - M), where Y is national income, C is domestic consumption, I is domestic investment, G is net government expenditure, X is export expenditure and M is import expenditure. Similarly, disposable income (Yd) is defined as follows: Yd = C + I + G + (X - M) - T, where T represents taxation. Denoting savings as S = Yd - C, we get: (X - M) = (S - I) + (T - G) current balance = net saving / dis-saving + government deficit of private sector / surplus Thus, we can state that a current account deficit has a counterpart in either private dis-saving (i.e. where investment exceeds savings), and/or in a government deficit (i.e. government expenditure exceeding taxation revenue). Whilst this identity is interesting, it is incapable of identifying causation. Thus, common statements that current account deficits are due to a lack of private savings or a large government budget deficit may appear obvious conclusions to reach from this identity. However, the evidence is equally consistent with the possibility that a current account deficit may cause the lack of private savings and budget deficit.
2. The meaning of traditional balance of payments policies
These traditional policies were based upon a synthesis of BOP theory in the 1950s and 1960s within the IS-LM framework extended to include international trade. We shall consider them under three headings;
(i) expenditure changing,
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(ii) expenditure switching,
(iii) direct controls.
For the UK this was designed to cater specifically for an economy with a persistent current account
deficit. A surplus can, of course, be equally problematic if, for example, it generates inflationary
pressure, but it is usually the case that a deficit is more difficult (or painful and unpopular) to
eliminate and thus constitutes more of a problem in practice. This approach was developed with UK
experience in mind and therefore rests upon two assumptions which pertained at the time the
traditional approach evolved. These were;
(i) fixed exchange rates
(ii) insignificant international capital movements.
3. Traditional balance of payments policies
3.1 EXPENDITURE CHANGING POLICIES
Expenditure changing policies are based upon an ‘open’ Keynesian income adjustment model (i.e. the#p#分页标题#e#
circular flow of income model) and the ‘absorption’ approach to the balance of payments.
Expenditure changing policies are designed to alter the level of spending in the domestic economy.
For example, to cure a deficit the economy would be deflated so as to cut spending on imports, whilst
leaving exports intact. This approach is based upon a Keynesian income adjustment mechanism
which is opened up to international trade. Exports are viewed as ‘injections’ into the circular flow of
income as income received from abroad, while imports constitute a ‘leakage’. The extent of the
leakage effect depends upon the marginal propensity to import which measures the change in
imports resulting from a given change in income.
Import Function
M0
M1
Y0 Y1
Real imports
Real Y
FIG ONE
FIG 1 illustrates how imports might be expected to vary with national income - an increase from Y0 to
Y1 leads to an increase in imports from M0 to M1. The ratio of these changes (equivalent to the slope
of the import function) defines the marginal propensity to import. In general, the higher the
marginal propensity to import (i.e. the most elastic the curve) the more effective the expenditure
changing policy will be.
It is expected that a direct relationship would exist between imports and either income or expenditure,
since any expansion of domestic activity would tend to suck in imports of raw materials for industry,
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and consumers are likely to spend a proportion of their extra incomes on imported goods. So if the government wishes to cure a deficit it would employ fiscal and monetary policies to contract domestic activity in order to reduce spending on imports. This could be done by lowering government spending, raising taxes, reducing the domestic money supply, raising interest rates, or any combination of these. National income will fall as a result through the Keynesian multiplier process and the trade balance should improve, depending upon the strength of the marginal propensity to import. In general the higher this propensity the more effective the expenditure changing policy will be. An alternative way to discuss this approach is by reference to what is known as the ‘absorption’ model. This emphasises the importance of using monetary and fiscal policies to reduce absorption (i.e. spending on domestic goods and services and imports) to correct a balance of payments deficit. The efficiency of this approach depends upon a multiplier process whose strength derives from the elasticity of import demand with respect to income. This approach starts from the national income model: Y = C + I + G + (X - M) If we allow total domestic absorption (A) to equal total domestic expenditure (C + I + G), then; Y = A + (X - M) Re-arranging, we find that the trade balance (X - M) is equal to national income less total domestic expenditure; Y - A = (X - M) Thus the trade balance is the difference between domestic income or production and domestic spending or absorption. If total domestic absorption exceeds total domestic output, by definition the country must be running a current account deficit, absorbing more than it produces and importing the difference. In this situation, the deficit could be cured by either increasing Y or reducing A. The specific approach chosen depends upon the state of the economy. If the economy is at full employment, increasing Y in the short-run will prove difficult and potentially inflationary. Consequently, under these circumstances, the brunt of the readjustment will tend to fall on A through expenditure-reducing policies. However, if all economic resources were not fully employed, Y could be increased with relatively few negative effects. The income adjustment model we have been using is a very simple one, based only on one country and some quite restrictive assumptions, including, firstly, fixed exchange rates and, secondly, an economy which is operating at less than full employment. Nonetheless, it is possible to make this model more complex within the general equilibrium framework (this is covered in lecture 3). The analysis can easily be expanded to incorporate more than one country. This is important since one country’s exports will be another country’s imports. Hence if the UK were to adopt expenditure-reducing policies to help solve its payments deficit, this would contract incomes in the rest of the world which in turn could reduce the demand for UK exports as the rest of the world’s imports (income) falls. This form of ‘beggar-thy-neighbour’ policy can have dramatic consequences on the volume of international trade if adopted on a world-wide basis; as witnessed in the 1930s. Two conclusions follow from this discussion of expenditure changing policies.#p#分页标题#e#
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1. An export-led ‘boom’ would have more favourable effects on the economy than a policy of domestic contraction to cure a deficit, as long as the economy is not at full capacity. This is because in the former case the expansion of national income resulting from the increase in exports will be more than enough to counter the rise in imports induced by the income increase, and so the trade balance will improve. With domestic contraction, however, although the trade balance improves when imports are forced down, national income itself has fallen, often resulting in unemployment.
2. Although an increase in exports is equivalent to an increase in domestic spending, in so far as it stimulates national income through the multiplier, the export-led expansion would improve the balance of trade at the same time, while domestic expansion would make it worse. This is because in the former case the rise in exports is sufficient to outweigh an increase in imports which the extra income generates. In the latter case, however, domestic spending will draw in imports without affecting exports, and so lead to a deterioration in the balance of trade.
Unfortunately, it is not usually possible for the government to engineer an increase in exports since they tend to be determined by factors outside the control of the exporting country, such as the growth of foreign income.
3.3 EXPENDITURE SWITCHING POLICIES
Expenditure switching policies are not intended to alter the magnitude of spending in the deficit country but to switch this spending away from imports to import substitutes produced domestically, and to switch spending by foreigners towards the deficit country’s exports. This can be achieved in a number of ways:
(i) tariffs - force up the price of imports in the domestic market,
(ii) subsidies - reduce the price of exports in overseas markets,
(iii) devaluation / revaluation - authorities lower value of the currency which is fixed in terms of another currency or a reserve asset like gold,
(iv) depreciation / appreciation - unofficial fall / rise in value of the currency against other currencies.
The main policy application of this analysis is devaluation of the currency. The question is whether devaluation can set in motion expenditure switching effects which lead to an improvement in the trade balance. The analysis which sought to answer this question has become known as the ‘elasticities’ approach, instead of assuming constant relative prices and varying income as under the multiplier analysis, the elasticities approach asks what happens when the relative prices (of currencies) change, and income is held constant. The term ‘elasticities’ was coined because the answer to this question depends to a large extent on the elasticities of demand and supply for imports and exports. The conditions under which devaluation would improve the balance of trade were formally represented in a formula named after the economists who derived it; Marshall and Learner. The condition from this formula which has become best known (and is often called the Marshall-Learner condition) is that devaluation will improve the balance of trade only if the sum of the elasticity of demand for the country’s exports plus the elasticity of demand for its imports exceeds unity. If both elasticities of demand for exports and imports are very inelastic, a devaluation would achieve relatively small changes in quantity and therefore the balance of trade would be worse.#p#分页标题#e#
The reasoning behind this condition concerns the relationship between changes in the foreign exchange market brought about by the devaluation, and changes in exports and imports. Devaluation raises the price of foreign currency and therefore makes imports look more expensive in the home market, unless foreign suppliers choose to drop their prices to compensate. Similarly, export prices will be cheaper in terms of foreign currency, and one might expect exporters to pass this on in lower
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selling prices abroad. [It is important to note that exporters might choose to keep foreign prices
constant and gain higher profits in terms of sterling than taking advantage of the devaluation and
lowering foreign prices and increasing sales]. The outcome, therefore, depends critically on the
response of imports and exports to the price changes brought about by the devaluation. If, for
example, buyers’ habits are rigidly fixed when prices change, as is likely in the case of oil and
tobacco imports, the devaluation will not succeed. Only if the demand for imports and exports is
responsive (elastic) will the rise in import prices choke off imports and a fall in export prices
stimulate a sufficient increase in export demand to enable devaluation to work.
There are a number of important theoretical qualifications to the elasticities approach. The first came
from the absorption approach which we discussed above. Indeed, the absorption approach was
designed specifically to investigate how devaluation affected both the balance of trade and national
income. What the absorption approach suggested was that devaluation could only improve the trade
balance if it either increased real output Y, or it cut real expenditure/absorption (A). In conventional
elasticity analysis it was taken for granted that devaluation would improve the trade balance even if
the economy were at full employment. The absorption approach, however, makes it clear that it will
only reduce payments imbalances if total absorption is reduced. In other words, if the economy is at
full employment, then devaluation must be accompanied by policies to reduce absorption in order to
leave room for the necessary reallocation of resources to increase exports and decrease imports.
This is why devaluation policies are typically accompanied by deflationary monetary and fiscal
policies. In practice, therefore, the absorption and elasticities approaches need to be combined to
explain the full repercussions of devaluation.
A second qualification to expenditure switching policies is the measurement of elasticities and the
time taken for them to have the desired effect on the trade balance. A good example of this
phenomena is observed in the so-called ‘J’ curve (FIG 2).
Balan
S
D
T
FI
Because trade contracts tend to be signed in advance of delivery, devaluation has no immediate effect#p#分页标题#e#
on the volume of trade. But since exports are typically invoiced in the country’s own currency and
imports in foreign currency, the initial effect of devaluation is to worsen the trade balance, because
the home value of exports falls while the foreign price of imports remains unchanged. By allowing,
therefore, for time lags in the import and export equations, the estimates obtained of the relevant
elasticities become more realistic approximations of their ‘true’ values.
The consensus, therefore, was that devaluation could improve the trade balance and that the larger the
elasticities the more likely it was to be successful, but that its competitive enhancing effects are
probably only transitory. Only monetarists remained more sceptical than this.
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3.4 DIRECT CONTROLS
If governments are pessimistic about the efficiency of relative price or income adjustment, and are
unhappy about the political repercussions of deflationary expenditure changing policies, or the ‘loss
of face’ involved in a devaluation, then they might turn instead to direct controls to solve their BOP
problems. These direct controls fall broadly into two categories; tariff and non-tariff barriers.
(a) TARIFFS
Tariffs are taxes placed on imported, but not on domestic, goods. Such a tax shifts the supply curve
of the foreign good upwards (leftwards) because it adds to the foreigner producer’s cost of every unit
sold in the country imposing the tariff (FIG 3). These come in two main forms, specific tariffs are so
much money per unit of the product (i.e. £10 per car or 3 pence per bag of sugar). Ad valorem
tariffs are a percentage of the price of the product (i.e. 5% of the retail price of a car and 3% per bag
of sugar).
Tariffs have two different and opposite purposes: for revenue and for protection. The former is less
common but did form a central part of the ‘Alternative Economic Strategy’ devised by Cambridge
University economists in the late 1970s and adopted in part by the Labour Party in the UK in 1983.
More typical is the protection motive, using tariffs to raise the price of imported goods in order to
discourage imports by offsetting (to some extent, at least) a cost advantage that foreign producers
have over domestic producers of a particular product. It is important to note that the protective
function of a tariff is opposed to the revenue function because the tariff will not yield a substantial
revenue if it is effective in cutting imports.
S2
S1
D
Price
Quantity
0
P2
P1
Q2 Q1
Fig 3 - The Effect of a Tariff
The ability of a tariff to reduce imports depends upon its size and upon the elasticity of demand for
the imported good. If the country which imposes the tariff produces close substitutes, demand is
likely to be price elastic. In these circumstances, a tariff will reduce imports by switching demand#p#分页标题#e#
towards the domestically produced substitutes. Conversely, if demand for imports is price inelastic,
the main effect of the tariff will be on import prices rather than on the quantity of imports.
Therefore by raising the domestic price of imports, a tariff helps domestic producers, but hurts
domestic consumers. Thus, tariffs have three main effects;
(i) transfers to government in the form of revenue
(ii) extra profits to producers
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(iii) net welfare losses to society arising from over production and domestic under-consumption of
the good.
(b) NON-TARIFF BARRIERS
Although tariffs remain a popular barrier to international trade in both developed and developing
countries alike, there are a number of alternative ways of restricting unwanted imports into a country,
or providing help to exporters. Indeed there has been a clear tendency. Since the second world war
to substitute these non-tariff barriers for tariffs as pressures for the removal of the latter gained
momentum through such organisations as the General Agreement on Tariffs and Trade (GATT).
1. Embargoes refer to the complete banning of the importation of specific goods into a country. A
topical example includes the EU embargo on the export of British beef and beef products because of
potential health risks. The problems associated with embargoes include the fact that they encourage
smuggling and the development of black markets.
2. Subsidies are provided in many, often clandestine, forms to avoid GATT and EU restrictions on
subsidies and dumping. The provision of export credit, VAT remission and regional aid may reduce
total costs for exporters thereby distort trade by affecting market prices. At the same time, subsidies
to domestic producers enable them to compete more easily with imported goods.
3. Quotas limit the quantity of the commodity that may be shipped into the country in a given period.
Until the quota has been reached there is no change in supply, but once the quota has been reached,
the effective supply curve becomes a vertical line. Although acting on supply rather than demand, a
quota has the same effects as a tariff in that it raises prices and domestic output whilst cutting the
volume of imports.
S
D2
D1
0
Price
Quantity
P2
P1
Q1 = quota
FIG 4 - The Effect of Quotas
4. Voluntary Export Restraints are a relatively recent phenomenon. They are similar in effect to
quotas but differ in that confrontation between governments is avoided as foreign countries are
‘requested’ to voluntarily limit their exports of specific products, with the unspoken threat of
‘official’ quotas if compliance is not adhered to. The clearest examples of VER’s are the deals
between Japan and both the USA and the EU during the 1980s, whereby the former has ‘voluntarily’#p#分页标题#e#
limited its exports of certain goods, most notably cars, to the latter two markets. The VER was
prompted by dissatisfaction amongst European and American governments concerning persistently
high trade deficits with Japan and the fear of the increasing popularity in protectionist sentiment
amongst domestic producers and employees affected by market penetration.
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5. Exchange controls are a method of protection whereby the amount of currency which can be used for buying imports is strictly rationed, whether the motive is to buy foreign goods and services, to travel 指导英国课程作业abroad, or to engage in foreign lending. The usual operation of such a policy is for foreign currency earnings (from exports) are deposited with the central bank, which authorises the withdrawals for buying of imports. In this way, selective control of imports can be achieved. In Britain up to 1979 when exchange control was abolished, transfers of cash and overseas investment were limited to protect the balance of payments. The welfare effects of exchange controls are similar to those arising from quotas, except that they cover foreign lending and tourist services as well as commodities. As with quotas, the main problems arise because of the often arbitrary way in which the foreign exchange is allocated, and as a result of the inefficiencies connected with the administration of the controls. For these reasons, economists tend to regard exchange controls with disdain, and in the 1970s and 1980s many countries such as the USA, the UK and West Germany have abolished them, while other countries such as Japan have significantly liberalised them. Nonetheless, they remain popular in most Less Developed Countries (LDCs) and in some Developed Countries (DC) such as Belgium, France and Italy, although in the case of the latter group the European single market of 1992 should signal the end of such practices. There are, however, some economists who regard them as an integral part of a strategy aimed at restructuring an economy suffering from severe BOP difficulties. Additional arguments in favour of exchange controls emphasise their ability to isolate domestic financial markets from international markets to secure a persistently lower interest rates than would otherwise occur, whilst additionally protecting economies from shocks caused by destabilising currency speculation.
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