chapter  10
Sources of imbalance—cost disparities
Pages 8

In the last chapter we considered those sources of payments disequilibrium whose impact effect on external payments tends to be offset by their income effects so that, on balance, they leave only a residual and lesser disturbance to be resolved by the movement of assets as described in chapter 8. Very different and more severe in their effects on the balance of payments are geographic differences in cost and price levels. High costs and prices relative to costs and prices elsewhere are the most intractable cause of payments difficulties for two reasons. First of all, the income effects of cost divergences not only do not mitigate but reinforce their impact effect on the balance of payments. The impact effect of cost and price levels higher than elsewhere is a price effect, which renders exports dear and imports cheap, and so inhibits the former and encourages the latter. The income effect further encourages imports, since the higher money income created by higher cost levels represents, in relation to imports, a higher real income.