A Theory of Balance-of-Payments Adjustments following upon Output Expansions in the Foreign-Trade and Domestic-Trade Industries

Abstract

policy have in the past given impetus to reexaminations of economic theory. Perhaps, the current discussion on the reform of the international monetary system, drawing attention to the urgent need for measures to strengthen the balance-of-payments adjustment mechanism, will stimulate interest in an examination of some hitherto neglected aspects of the existing balance-of-payments theory. In the present instance, the impetus to thought was provided by a recent suggestion by Walter S. Salant that persistent payments deficits or surpluses can be reduced by policies to stimulate the flow of capital into or out of export and import-competing industries. 1 More recently, a similar proposal was put forward in a report to the Joint Economic Committee of the U. S. Congress by two influential members of the Committee.2 Although no detail is given in either proposal, it is not difficult to conceive a combination of tax, loan, and technical assistance programs to assist business firms in major export or import-competing industries to renovate their capital equipment and expand their outputs during periods of persistent deficits in the country's balance of payments, and to reduce or even reverse such assistance programs during periods of persistent payments surpluses. The proposed policy evidently is aimed at correcting chronic payments imbalances, rather than short-run imbalances attributable to random