Prosperity and Depression.pdf

Chap. 13 The Multiplier, Rigidities and Public Spending 4Ttdue, say, to an increase in foreign demand in period 1 will raise income,which will be spent in period 2 and will lead to a rise in imports inperiod 3, which constitutes a "leakage" and prevents income from risingas high as it otherwise would.A few observations may now be added on the relationship betweenthe new type of analysis of the cyclical implication of foreign tradechanges and the -more traditional approaches on which Chapter 12 ofthe present study is based. The concepts of the foreign-trade multiplierand the marginal propensity to import are new, but the underlying ideascan be traced back a long way in the history of economic thought,though sometimes only in a rudimentary form.It has always been held that an excess of exports (favorable foreignbalance) will lead to a rise in prices and incomes. It is true that alarge part of traditional ("classical" ) analysis was carried out underthe assumption of full employment. In consequence too much emphasiswas laid on changes in the price level, although the critics of the classicaltheory should not forget that a price rise implies also a rise' inmoney incomes; hence income changes were not completely neglected.In any case it is not difficult to amplify the theory by pointing out thatif there are idle productive resources available, incomes, in monetaryand real terms, can rise even without a change in the general price level.Similarly, when the foreign balance becomes unfavorable, incomes willfall not only when prices fall, but also if prices are rigid and remainunchanged. In the latter case the fall in incomes is brought about bya fall in output and employment.It is true that traditional theory has laid much stress on gold flowsas a necessary condition for price and income changes, while the modernanalyses tend to minimise the importance of gold flows. 1 In the traditio~altheory it is often assumed that if an export surplus is offset by an inflowof gold, prices and incomes will rise, but not if it is offset by an outflowof capital. This conclusion depends upon the full employment assumptionand the assumption of a constant MV or ,at least V, which is madefrequently, but by no means always. This assumption can, however, bedropped. If it is assumed that the supply of loanable funds is perfectlyelastic, an export surplus will bring about a rise in prices and/or incomesirrespective of whether it is financed by an. import of gold or anexport of capital.1 See esp. Harrod, op. cit., passim.