Balance-of-Payments Theory and the United Kingdom Experience PDF
Preview Balance-of-Payments Theory and the United Kingdom Experience
BALANCE-OF-PAY MENTS THEORY AND THE UNITED KINGDOM EXPERIENCE Also by A. P. Thirlwall * GROWTH AND DEVELOPMENT: with Special Reference to Developing Economies * INFLATION, SA VING AND GROWTH IN DEVELOPING ECONOMIES * FINANCING ECONOMIC DEVELOPMENT * REGIONAL GROWTH AND UNEMPLOYMENT IN THE UNITED KINGDOM (with R. Dixon) * KEYNES AND INTERNATIONAL MONETARY RELATIONS (editor) * KEYNES AND LAISSEZ-FAIRE (editor) * KEYNES AND THE BLOOMSBURY GROUP (editor with D. Crabtree) * KEYNES AS A POLICY ADVISER (editor) * KEYNES AND ECONOMIC DEVELOPMENT (editor) NICHOLAS KALDOR THE ESSENTIAL KALDOR (editor with F. Targetti) FURTHER ESSAYS ON ECONOMIC THEORY AND POLICY: Vol. 9 COLLECTED ECONOMIC ESSAYS OF NICHOLAS KALDOR (editor with F. Targetti) * EUROPEAN FACTOR MOBILITY: TRENDS AND CONSEQUENCES (editor with fan Gordon) DEINDUSTRIALISATION (with S. Bazen) * ECONOMIC GROWTH AND THE BALANCE OF PA YMENTS CONSTRAINT (with J. McCombie) Also by Heather D. Gibson * THE EUROCURRENCY MARKETS, DOMESTIC FINANCIAL POLICY AND INTERNATIONAL INSTABILITY * ECONOMIC INTEGRATION AND FINANCIAL LIBERALIZATION: PROSPECTS FOR SOUTHERN EUROPE (editor with E. Tsakalotos) * Also published by Palgrave Macmillan Balance-of-Payments Theory and the United Kingdom Experience FOURTH EDmON A. P. Thirlwall Professor of Applied Economics University of Kent at Canterbury and Heather D. Gibson Lecturer in Economics University of Kent at Canterbury M © A. P. Thirlwall 1980, 1982, 1986 © A. P. Thirlwall and Heather D. Gibson 1992 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1980 by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world ISBN 978-0-333-56648-0 ISBN 978-1-349-21806-6 (eBook) DOI 10.1007/978-1-349-21806-6 A catalogue record for this book is available from the British Library. Second edition 1982 Third edition 1986 Reprinted 1988 Fourth edition 1992 Reprinted 1993 Contents Preface to the Fourth Edition x Acknowledgements xiii 1 Balance-of-Payments Accounting and the Foreign- Exchange Market 1 Concepts of the balance of payments 1 The accounting balance of payments 2 Balance-of-payments equilibrium 5 More on the concept of equilibrium 13 The foreign-exchange market 22 Tbe demand for dollars 23 The supply of dollars 25 Capital movements and speculation 30 Tbe forward rate of exchange ~2 2 The Capital Account of the Balance of Payments 37 Tbe components of the capital account 38 Official Reserves 41 Special Drawing Rights (SDRs) 46 Tbe Balancing Item 49 Tbe capital account and the net external wealth of the UK 51 3 Exchange Rate Determination S9 Tbeories of exchange rate determination 60 Purchasing Power Parity 60 Current Balance Model 65 Tbe importance of theories of expectations forrnadon 66 v vi Contents The Mundell-Fleming Model 69 Exchange Rate Overshooting Models 77 The Portfolio Model of exchange rate determination 85 Speculative Bubble Models of exchange rate determination 91 Exchange rate determination: what have we learnt 94 Exchange rate systems and policies 96 Fixed versus flexible exchange rates 97 Types of exchange rate regime 102 Controls on capital movements 121 Exchange rate policies in the 1990s 127 4 The Balance of Payments and the National Economy 129 The integration of the balance of payments into the national accounts 129 The conflict between balance-of-payments equilibrium and other objectives of economic policy 131 Income equilibrium in an open economy and the open economy multiplier 136 The open economy multiplier relating imports to expenditure 139 The 'new' open economy multiplier with foreign repercussions 145 Balance-of-payments adjustment 148 The classical price-specie flow mechanism 150 The elasticity approach 150 The absorption approach 152 The monetary approach 153 5 The Elasticity Approach to the Balance of Payments 155 The Marshall-Lerner condition derived 155 Devaluation and the response of firms 162 Lags and the J-curve effect 166 Devaluation and inflation 168 Devaluation and the terms of trade 177 The difficulties of measuring price elasticities 178 6 The Absorption Approach to the Balance of Payments 183 The direct effect of devaluation on income 185 Contents vii The direct effect of devaluation on absorption 186 The interaction between changes in income and changes in absorption 188 Strengths and dangers of the absorption approach 190 The monetary aspects of balance-of-payments deficits 192 Domestic credit expansion 193 7 The Monetary Approach to the Balance of Payments 195 8 Simultaneous Internal and External Balance 203 Internal and external balance under flexible exchange rates with no capital movements 205 Internal and external balance under fixed exchange rates with capital movements 209 Internal and external balance in an IS-LM curve framework 214 The use of monetary and fiscal policy under alternative exchange-rate regimes 216 The assignment of policies in the United Kingdom 217 9 A History of the UK Balance of Payments 219 1854 to 1939 219 1940 to 1950 225 1951 to 1959 228 1960 to 1969 231 Devaluation, 1967 239 1970 to 1979 243 Since 1980 251 Appendix: a polemic on floating the pound, 1972 258 10 Import Functions 272 The determinants of imports 272 Imports and capacity 274 Imports and labour-market bottlenecks 278 Imports and income (estimates of income elasticities) 281 Imports and relative prices (estimates of price elasticities) 285 Import penetration 286 viii Contents 11 Export Functions 291 The determinants of exports 291 Exports and capacity 292 Exports and world income (estimates of income elasticities) 298 Exports and relative prices (estimates of price elasticities) 299 Export performance in manufacturing 304 The United Kingdom's declining share ofworld exports 306 North Sea oil and the balance of payments 315 Appendix: Commodity and geographie composition of UK exports and imports 319 12 The Balance-of-Payments Equilibrium Growth Rate 323 The determination of the balance-of-payments equilibrium growth rate 324 A fundamental law of growth 328 The model with capital ftows 332 Use of the model for forecasting and simulation 333 Conclusion 336 13 Export-Led Growth 337 The importance of export-Ied growth 337 Models of export-Ied growth 341 An export-Ied growth model with a balance-of- payments constraint 347 14 The Balance of Payments as a Structural Problem 351 Non-price factors determining exports and imports 354 The 'new' trade theories 359 Studies of non-price competition 361 Research and development effort 363 Contents ix IS Deindustrialisation and the Balance of Payments 366 Does deindustrialisation matter? 366 The causes of deindustrialisation 372 A trade strategy for the United Kingdom 378 The future 384 Notes 389 References 401 Index 423
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