8 - TRADE AND PAYMENTS WITH FIXED PRICES

Summary

The monetary approach to the balance of payments, as expounded in the previous chapter, is essentially a Walrasian equilibrium theory of international trade involving financial assets. If one country has a trade surplus, this is because its aggregate consumption plans fall short of aggregate production plans in the current period, while the opposite is true for the rest of the world. Thus any payments imbalance is a planned imbalance–not planned by any central agency, but consistent with the optimum plans of all consumers and producers. And there is an obvious analogy between payments imbalances and trade in goods. That enables a country to consume more of one good than it produces in return for consuming less of another. Payments imbalances enable a country to trade excess saving today against excess consumption later, or vice versa.

The monetary approach can, therefore, be seen as an extension of the standard model of trade, allowing for trade in claims on future production in addition to trade in current goods; the only difference is that the former claims are held in the form of financial assets instead of futures contracts for specific goods. As such, the approach is valuable. For example, it points out that trade imbalances need not indicate market failure–on the contrary, such imbalances can be evidence of gains from intertemporal trade. To counter the popular belief that any trade imbalance is a disequilibrium indicating a need for action, such a model can be very valuable indeed.