Prosperity and Depression.pdf

Chap. 13 Tbe iWultiplier, Rigidities and Public Spendi.'!l. 461the point of view of the multiplier analysis, it would still be regardeda~ having "leaked from the circulation," tothough in a real sense ithas not.We shall now discuss first the application of the multiplier analysisto a special problem, viz., to exports, imports and the foreign balanceand then the combination of the multiplier with the acceleration principlein dynamic model sequences.§ 2. THE FOREIGN TRADE MULTIPLIERThe multiplier analysis has been applied by various writers to internationaltrade problems. In fact, if an attempt is made to evaluate themultiplier statistically, it is imperative to come to a decision on how totreat exports and imports, etc., in the calculation. The concept of a"foreign trade multiplier" has been introduced and given a differentmeaning by different writers. 1The most natural and easiest method of dealing with internationaltrade relations in the multiplier analysis would seem to be to adjustthe multiplicand (and not the multiplier). In a closed economy themultiplicand is the value of (net) investment 2 (expressed in monetaryor real terms). In an economy which has trade relations with othercountries, investment must be so interpreted as to include the "foreignbalance." This is, for instance, Mr. KEYNES' approach. celt is most importantto understand", he says, cethat the, effects of loan expenditure1 See the illuminating note by Professor Robertson: "Mr. Clark and theForeign Trade Multiplier", in Economic Journal, June 1939.2 There are certain conceptual difficulties (apart from statistical ones) involvedin the separation of replacement from net investment. It is frequently saidthat replacement (reinvestment) also generates income and should be includedin the multiplicand along with net investment. On the other hand, it seemsobvious that "current'I replacement cannot be regarded as income along withcurrent consumption, because this procedure would clearly involve double counting.The solution must hinge upon the distinction between current replacementand replacement in the historical sense; and this distinction, in turn, dependson the length of the period for which the calculation is made. For example, ifat the bottom of a long depression, investment activity revives, it may be regardedas re-investment in the (historical) sense that the capital structure is broughtback to the level of the preceding peak. But from the point of view of the depressionlow the same activity has to be counted as new investment. It is thislatter interpretation that matters for the multiplier analysis.