ABSTRACT
THE problem of the effects of economic growth on international trade has excited increasing interest since the war, in connection with discussions of ‘dollar shortage’ and the development of ‘underdeveloped countries’, and more recently of Britain’s long-run economic prospects. This chapter examines, as a background to such discussions, the theoretical effects of economic expansion on the volume and terms of trade between manufacturing and primary-producing countries. By ‘economic expansion’ is meant the growth of output, whether as a result of population growth, capital accumulation, or technical progress: it is assumed that these causes of expansion can in principle be isolated one from another, and that certain technical difficulties in defining them can be ignored. The analysis is concerned with the disturbances introduced by different types of expansion and the adjustments required to maintain international equilibrium, on the assumption that full employment is maintained and that competitive conditions rule in the markets for goods and factors of production. For simplicity, the argument is presented in terms of two countries, Mancunia and Agraria; Mancunia is assumed to export manufactured goods, and Agraria to export foodstuffs. It is further assumed that manufactures are a luxury good and foodstuffs a necessary good, in the technical sense that the income-elasticity of demand for manufactures is greater, and the income-elasticity of demand for foodstuffs less, than unity. 1
