The Transfer Problem Revisited

Abstract

Since the early 1950s little has been written on the effect of income transfers between countries on the terms of trade of the transferor. In large part this is explained by the fact that the issue of transfer in the context of a standard two-country, two-commodity model of trade was so comprehensively treated by Samuelson in two papers in the Economic Journal in 1952 and 1954.2 primary purpose of Samuelson's two articles was to focus intensively on the doctrine whereby there is a presumption that the terms of trade will deteriorate for the country making the unilateral transfer, the country. After an exhaustive study of arguments that had previously been put forth to support the orthodox doctrine, Samuelson concluded that in the absence of transport costs, tariffs or other impediments to trade, . . there is no presumption that the terms of trade will deteriorate rather than favour the paying country.3 In his second paper (1954), Samuelson showed how the orthodox presumption could, in certain cases, be restored once impediments to trade are explicitly introduced. In this paper I intend to suggest that in a wide variety of cases there is a presumption as to the way in which the terms of trade will move with transfer, even in the no-impediments model. However, the bias is anti-orthodox: there is a presumption that the terms of trade move in favour of the transferor. That is, the real income loss represented by the transfer at initial prices may be mitigated by the secondary effects of an improvement in the terms of trade.4 Furthermore, my argument for the anti-orthodox bias in the no-impediments case is best illustrated by making the same explicit assumption about tastes and Engel's 1 I am indebted to the National Science Foundation for support of this research and to Richard Caves, Paul Samuelson. and Jagdish Bhagwati for useful discussion on a number of points. 2 P. A. Samuelson, The Transfer Problem and Transport Costs: Terms of Trade when Impediments are Absent, Economic Journal, June 1952, and The Transfer Problem and Transport II: Analysis of Effects of Trade Impediments, Economic Journal, June 1954. These have been abridged and brought together in The Transfer Problem and Transport Costs, chapter 8 in Caves and Johnson (eds.), Readings in International Economics, Homewood, Ill., 1968. Sanmuelson's two articles were followed by a piece by Harry Johnson, The Transfer Problem: A Note on Criteria for Changes in the Terms of Trade, Economica, May 1955. There has been more recent interest in the transfer problem within the context of models more complicated than the standard two-commodity case, for example I. A. McDougall, Non-Traded Goods and the Transfer Problem, Review of Economic Stuidies, January 1965. 3 Samuelson, 1952 article, p. 299. 4 Of course this secondary effect can never outweigh the primary loss in a stable market. paying country suffers a net loss of real income.