Four Alternative Policies to Restore Balance of Payments Equilibrium
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Stimulated by Fleming's study on a related subject, the author compares four methods to eliminate balance of payments disequilibria between high-employment countries forming a closed group: (i) "discriminatory" import duties and subsidies, (ii) "discriminatory" duties only or the corresponding quantitative restrictions, (iii) nondiscriminatory duties, and (iv) devaluation or income adaptation. For each an "optimum version" is defined and chosen; they are compared as to (a) the loss in international trade and (b) the distribution of the "direct burden" between the countries (defined as the short-run loss in real expenditure). A number of rather specific simplifications are introduced, all tending to make the case as symmetric as possible with regard to countries and commodities. As a consequence of the high-employment hypothesis and of absence of production substitution, problems of optimum allocation of resources are ruled out; the approach is a short-run one. Only policies (i) and (iv) show no loss of trade, whereas the others do; but in the case of devaluation the "direct burden" is relatively heavier for the deficit countries than in the other three cases.
- import duties
- country i