THE USE OF HOME RESOURCES TO SAVE IMPORTS: A NEW LOOK

Abstract

An earlier article *was concerned with the assessment of the net contribution (if any) made to the balance of payments by a marginal expansion of U.K. agricultural output. Such evidence as there is suggests that an increase in U.K. agricultural output would make a positive contribution to the Balance of Payments, though this contribution might be only about one half the value of net import saving. In addition it is necessary to compare agricultural expansion with other measures which are intended to make a positive contribution to the Balance of Payments. The purpose of this article is to re‐examine the theoretical ideas behind the argument for using home resources to save imports. This argument was first put forward in the early 1950's and was concerned primarily with agricultural import saving and export promotion as alternative methods of alleviating the contemporary Balance of Payments problem. The argument has become relevant once again with the current proposal for further agricultural expansion to aid the U.K. Balance of Payments. A new method of presentation is employed which it is hoped adds clarity to the exposition. In addition it is suggested that the theory behind this argument is inadequate from the point of view of its application to agricultural import saving: agricultural import substitution gives a country only the potential to turn the terms of trade in its favour. A necessary second stage in the process—the realisation of this potential—seems to have been overlooked by previous writers. The theory is also considered under an assumption of flexible exchange rates, and it is argued that the use of the exchange rate as a balancing mechanism results in a failure to exploit any inelasticity of demand for a country's exports