chapter  9
Sources of imbalance—shifts in demand
Pages 12

The last chapter, besides posing the general problem of the balance of payments, presented the classical theory of the forces of balance-ofpayments adjustment, known in a rudimentary form already to David Hume. But the movement of assets, and the changes in wealth and income brought about by the sale and purchase of assets, are not the only forces of payment adjustment. Sometimes the very change in conditions that disrupts an initial balance also generates equilibrating forces, quite separate from and additional to those just discussed. For a complete analysis of the subject, these too must be taken into account. They are known as payments adjustment by income changes; sometimes also called the Keynesian adjustment mechanism. 1 Moreover, since not every disruption of the balance of payments generates these forces, to know when and how they arise is as important as to know the way they operate. In this and the next two chapters therefore we shall deal with the separate problems and resolutions of

Shifts in Demand

a fall of incomes in her export and/or import-competing industries, and partly because the impact of this fall on domestic spending will lower incomes yet further. In symbols:

~Yn = - ~z + dn~Yn' Collecting and rearranging terms, the total fall in North's income appears as

1 ~ Y n = - 1 _ d n

and the induced fall in its imports as

F In z ~ n = - 1 - dn ~ • Let us denote the response of a group's imports to an autonomous change in the outside world's effective demand for its output by the symbol g, so that

gn = 1 - dn .