CONTINUED FROM LAST WEEK
In this case, its policy would be to budget for a surplus. If there is too little purchasing power, the monetary authorities do the reverse by lowering interest rates so as to encourage borrowing, and by selling purchasing power in exchange for Stocks and Securities. The government, in particular, may reduce tax or embark on large public works in order to put more money into circulation. To this end, it would adopt the policy of deficit budgeting. In addition to all this, administrative guidelines or directives may be issued to the banking and other financial institutions, in order to ensure the liberalisation or restraint of credit or purchasing power, as and when necessary.
In spite of all this, however, experience has shown that, as time goes on, prices do tend to continuously rise. As we have noted, the monetary authorities constantly keep their eyes on the monetary weather-vane. When the volume of money and other monetary instruments show an ominous rise, the monetary authorities go quickly into action, but not before. At this point in time, the harm is already done; and the best that is invariably achieved is the prevention of such a rise getting completely out of hand. The clear verdict of economic history, however, is this. Once the ascent is made, it may be reduced to a lesser degree, but it has never been possible to return to the base from which that ascent has been made. Hence, the purchasing power of £1 today is worth less than its counterpart ten years ago, and will be worth less than now, ten years hence.
Just as money is a commodity sold and purchased like other goods at the domestic level, so it is at the international level. If the price of money is higher in A than in B, people in B will tend to offer their country’s currency in exchange for the currency of A, in order to benefit from the higher price of money in A; provided of course, there was parity of exchange between the two currencies before the price of A’s currency goes up, and provided also that people in B have confidence in the stability of A’s government, and in the credit-worthiness of its monetary authorities and other financial institutions.
THREE: If a country can produce all the things that its people require to satisfy their wants; if it can produce these things better than any other country in the world; and if its efficiency in the production of these things is equal, it will not need to trade with other countries. But this is manifestly impossible. There are, therefore, three causes of international trade. It arises:
(i) because a country does not produce or is unable, because of lack of the requisite natural resources, to produce all that it requires;
(ii) because certain things which it can produce can be produced more cheaply or better in other countries; and
(iii) because though it can produce certain items of goods more cheaply than other countries, yet its efficiency in the production of some of these items is less than its efficiency in the production of the other items.
In economic parlance, international trade exists because every country tends to concentrate on those goods in the production of which it has greater comparative advantage or less comparative disadvantage.
In other words, the real basis and raison d’ etre of International Trade is international division of labour trade between two countries may be straightforward barter under a bilateral arrangement. This form of trading will be successful only if, as is the case of barter between two individuals, there is a double coincidence of wants between the two countries concerned. In addition, the terms of trade between them must be equitable, and either side must not supply more or less than each requires. Again, as in the case of barter between two individuals, bilateral trade arrangement of this kind is not always a success.
Apart from the obvious difficulties in the way of trading by barter, a bilateral trade arrangement prevents the countries concerned from enjoying, to the full, the fruits of international division of labour, and constricts them in their search for; or the pursuit of the optimum in the fields of production in which they separately have greater comparative advantage or less comparative disadvantage. It is, therefore, generally recognized that multi-lateral international trading is much better than strict bilateral trading.
Whether bilateral or multi-lateral, international trading transactions are subject to the law of supply and demand in the same way as buying and selling between individuals in a country are ‘ governed by the law. And the favourableness or unfavourableness of the terms of trade, as between one country and another, will depend, other things being equal, strictly on the state of supply relative to demand as between the two countries. This statement, however, deserves serious qualification. The movement or flow of goods between one country and another is by no means free. In order to raise revenue; to protect infant industries at horne; to execute national policies in relation to development, defence, and security; to achieve balance of payments equilibrium; and to act in retaliation against another country; for any of these reasons a country may impose tariffs on goods imported into or exported from its territory. It may even do more: it may totally prohibit or subject to quota-allocation the exportation or importation of certain items of goods; it may subsidize the exports of some classes of goods, and may devalue its currency in order to encourage export trade generally. When all this is done, the normal operation of the forces of supply and demand as between nations is temporarily suspended and permanently distorted. The terms and directions of trade are also seriously affected and disturbed. In these circumstances, it becomes very difficult, if not impossible, to make any intelligent and accurate forecast of the results of international trading.
If imports and exports between two countries are exactly equal in value, no problem arises. But except in isolated cases of bilateral trading agreement, this cancelling out of import-export transactions is rare. When a country, therefore, imports more from than it exports to another country, or when, in a state of multi-lateral international trading, a country which we will call A imports goods from another country which we will call B and exports goods to a third country.
CONTINUES NEXT WEEK
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