The Purchasing Power of British Exports Further Considered

Abstract

In his article The Purchasing Power of British Exports (Economica, February, 1955) Mr. R. L. Marris draws attention to the well-known historical fact that the volume of British exports tends to rise when the terms of trade become more adverse to the United Kingdom and to fall when they become more favourable. This relationship is shown and calculated with the aid of two charts. In the first chart the volume of merchandise exports for each of 29 years from 1920 to 1954 is plotted against the volume of imports that could be paid for each year out of that year's exports. The balance of trade is thus taken to be in regular. equilibrium. The purchasable volume of imports is obtained by deflating the export volume for each year by that year's terms of trade index. The relationship is held to be linear, i.e. a constant amount of decrease in the terms of trade is associated with a unit increase in the volume of exports. In the estimating equation the terms of trade are taken as the dependent variable. In the next chart the volume of exports is plotted against the terms of trade indices for 19 years over the period 1920-52. The linear correlation coefficient is found to be 0i95 and the estimating equation suggests that the volume of exports could be predicted by subtracting 100 from twice the sum of the terms of trade index for the year in question. For the inter-war years the predicted volumes closely approximate the actual volumes while for the post-war years the margin of error is greater and a number of adjustments of either the actual volumes or the actual terms of trade indices is suggested. On the basis of these calculations Mr. Marris urges a radical change in the United Kingdom's foreign trade policy and issues a challenge to those who support the policy of increased exports. Several detailed criticisms of the procedure followed by Mr. Marris might be advanced. Thus the appropriateness of the suggested adjustments for the postwar period, when the estimating equation was found less satisfactory, might be questioned. The absence of adjustments for the period after 1929 might be queried in view of the fact that the rapid growth of exchange and import controls would hardly permit the fulfilment of what is said to be essentially an equilibrium demand relationship . Again, Mr. Marris alleges that the historical data are innocent of changes due to a relative movement in the prices of United Kingdom manufactures and those of competitors in third markets, because such relative movements just did not take place after 1918. This view is quite contrary to the facts, as demonstrated by Sir Donald MacDougall in