Increasing Productivity, Income-Price Trends and the Trade Balance *

OF the many factors which have been discussed in the attempt to provide a theoretical explanation of chronic balance-of-payments disequilibria in general, and a meaningful concept of ‘dollar shortage’ in particular, those centring on the ‘dynamic’ problems associated with the high rate of increase of American productivity have tended to find increasing favour in recent years. ¹ Such explanations of chronic disequilibrium are of two sorts. ² On the one hand, there is the argument that American money income rises less rapidly than productivity, so that American prices fall and the outside world is obliged to choose between secular deflation and secular depreciation (or between periodic deflations and periodic devaluations); on this line of argument chronic disequilibrium is a problem of monetary adjustment. On the other hand, there is the argument, elegantly formulated on a recent occasion by Professor Hicks, ³ that technical progress in the United States is strongly biased in favour of import substitutes, so that, apart from monetary complications, economic progress there imposes a real loss on the outside world; ⁴ on this line of argument chronic disequilibrium is basically a problem of real adjustment.