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International economics: analysis and issues
Book reviews
365
discipline and the danger of asymmetrical inflationary dislocation of equilibrium levels themselves. (This is not to say that the argument is decisive, but appraising it would exceed the scope of a book review. One would have to compare, as Einzig does not, the inflationary tendencies of the free-rate system and those, demonstrated in both theory and experience, of the Bretton Woods system.) The book provides a fair sample of the level of argument commonly used against free exchange rates and reminds supporters of that system of the kinds of misunderstandings they must cope with. It will figure prominently for years on reading lists in international finance. Leland B. Yeager University of Virginia
Charles E. Staley, International Economics: Analysis and Issues. (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1970, pp. x + 285.) This book consists of two parts, the first, entitled International Trade, contains Chapters 1 to 14 (17 1 pp.) and the second, entitled The Balance of Payments, contains Chapters 15 to 22 (111 pp.). The book is written as a text or a supplement to a text, and makes no claims for originality, and I shall therefore evaluate in on those terms. Although the book is plainly meant as a text, it is not clear at what level the book is meant to be used, for there is a great deal of unevenness with respect to difficulty. The discussion ranges from very elementary treatments of the transformation curve and the construction of the factor box diagram, and descriptions of what indifference curves, isoquants, and IS and LM curves are, to the mathematical derivations of such things as the Metzler condition for a tariff to leave domestic prices unchanged (pp. 45-6, p. 11 1), the formula for the optimum tariff (p. 12 l), and the condition for a transfer to improve the terms of trade under both classical and Keynesian assumptions (p. 263 the author does not formally define and pp. 266-7). Furthermore, either the production function or the utility function, returns to scale are never formally defined, and none of the basic trade theorems are derived mathematically. In fact, the standard geometric demonstration of the Heckscher-Ohlin Theorem is not even included.
366
Book reviews
A major drawback of the book as a text are the diagrams, for there are many that are unclear, and at least seven that are incorrect. An initial annoyance is that figs. 2-l(b) and 2-2(b) (pp. 12 and 18) have been interchanged. Then on page 28 we are told that a tariff has reduced trade, but this is anything but obvious from the accompanying fig. 3-6. And in this figure, the before-tariff and after-tariff consumption points imply extremely strange demand assumptions. In figs. 4-7(a) and 4-7(b) (pp. 42-3) the student will have difficulty interpreting the broken lines as portions of offer curves. In fig. 4-8 (P. 44) a line OB, which the author calls the international terms of trade, has been included, but where this line comes from is impossible to tell, and indeed under the assumptions given could not be an equilibrium price line. And the discussion following this figure is not at all clear. In fig. 5- 1 (p. 53) in the factor box diagram one of the points of tangency between the two sets of isoquants (X=500, Y=lOO) is clearly not on the efficiency locus. In fig. 6-l (p. 68) although we are told that imports are equal to exports, they are clearly not equal in the diagram. In fig. 9-4 (p. 99) which shows the two offer curves for increasing returns to scale, one of the curves is incorrectly drawn at the origin. In fig. 13-2 (p. 153) while we are told that the isoquant shift represents a neutral technological change, it is not a neutral shift in the diagram. In fig. 14-1 (p. 162) a factor box diagram is used to show that with different wage-rental ratios in the two industries, the equilibrium point will not be on the efficiency locus, and fig. 14-2 shows the resulting transformation curve. Unfortunately, the transformation curve which would correspond to fig. 12- 1 would be convex to the origin while the one shown is concave. In the discussion of the optimum amount of foreign investment the diagram itself is correct (fig. 21- 1, p. 269) but the discussion of the diagram is not, and the argument stops well short of proving the point. Most of these points will not present problems to readers who are already familiar with the subject, but they can be of great annoyance to teachers and students. There are also instances where additional diagrams could have substantially increased the clarity of the argument. Another difficulty is that it is often not clear exactly what assumptions are being made, and the discussion shifts from one model to another with very little warning. For example, on page 60 where the author &scribes the Leontief technique for testing the HeckscherOhlin theorem, the reader is not reminded of the implications of the Leontief model for production and trade. And in Chapters 13 Growth,
Book reviews
361
Capital and Trade) and 21 (The Theory of Capital Movements) it is not made clear which assumptions of the Heckscher-Ohlin theorem are being retained and which are being released. In the second part of the book, particularly in Chapters 18, 19 and 20, it is not always made clear what things are being allowed to vary and what things are being held constant. In particular, it is often not clear whether prices can change, what assumptions are being made about capital flows, and whether or not a change in the balance of payments position is being allowed to change the money supply. There is also some confusion about when the situations being described diagrammatically are equilibrium situations and when they are not (as an example see pp. 214- 18). In Chapters 19 and 20, where flexible exchange rates are discussed the author makes such statements as “The exchange rate is a tool, like monetary and fiscal policy” (p. 246), and “Then the dollar is depreciated...” (p. 226), and one is never certain whether the rate is assumed to be market determined or is just adjustable. Uncertainty also surrounds the cause of these changes. In Chapter 20, pp. 246-S 1, it is not at all clear what kind of model the author had in mind, and in particular it is not apparent how he is changing the interest rate in the absence of a monetary sector. Turning now to some comments of a more subjective nature, I feel that the discussion of the determinants of trade could be substantially improved. I think that it is important to make it clear that here are, in general terms, five independent reasons why trade can take place, these being: differences in production functions, differences in endowments, increasing returns to scale, differences in demand conditions and departures from the conditions of competitive equilibrium. It is also important to distinguish those influences, including tariffs and transport costs, which can change the volume of trade but cannot themselves cause trade or change its direction. As a third category we have the assumptions which again cannot cause trade but which are necessary for the proofs of certain specific theorems. These include the absence of factor intensity reversal and the equality of the number of goods and factors. In my view the author has not been careful enough in distinguishing among these three types of assumptions. Indeed the proposition that differences in demand can cause trade is never explicitly introduced, even though Chapter 10 is concerned with tastes and the distribution of income. I am also unsatisfied with the treatment of the so-called Leontief Paradox (pp. 60-6). In light of the fact that there are at least five basic
368
Book reviews
and independent reasons why trade can take place, those who see significance in the Leontief results must either feel that all determinants except differences in endowments are absent, or that all other determinants would be completely dominated by endowment differences. There would seem to be no a priori reason for either of these views. It should also be noted that the Heckscher-Ohlin conclusions are consistent with at least two other explanations of trade if factors are mobile. 1 feel that the Heckscher-Ohlin Theorem could have been made more clear. The traditional diagram showing different transformation curves and the resulting trade pattern is introduced only once on page 27, and here, although the transformation curves are explicitly made quite different, the trade pattern that is shown is due to extreme differences in demand patterns, so that the Heckscher-Ohlin result is not observed. The fact that trade is due to demand differences is not brought out, and the statement that “specialization is less after trade than it was before” is likely to give rise to confusion. And in the discussion of the Heckscher-Ohlin Theorem we find the misleading statement that “If country 2 has a relative abundance of labor, it will be able to produce more labor-intensive good X for a given amount of Y than country 1 can.” (p. 5 1). It is disappointing that there is virtually no discussion of the basic gains from trade theorem, and 1 did not find the discussion of community indifference adequate. In the chapter on customs unions, the authors interprets Viners’ demand assumption as one of perfectly inelastic demand, and while one can perhaps justify such an interpretation, it is certainly not the traditional one. In the second part of the book, on the Balance of Payments, the discussion is almost always in terms of a deficit rather than a surplus, and students could get the impression that deficits are ‘bad’ and of surpluses is never surpluses are ‘good’, and the undesirability explained. The student could easily get the impression that quotas, tariffs and income changes are quite acceptable methods of adjusting the balance of payments. And in chapter 22 on liq_Gdity, it is not made sufficiently clear that a liquidity shortage is almost always just a symptom of an underlying balance of payments problem due to the lack of an automatic adjustment mechanism. In chapter 17 one could easily be led to conclude that changes in aggregate demand were part of the price-specie-flow mechanism, and the argument in this section is anything but clear (pp. 195-6). In the discussion we are not even told that a gold standard is being assumed and that the “rules” are being followed. (As a matter of fact, the gold
Book reviews
369
standard is never discussed.) Finally, in discussing the transfer problem, the author claims that with tariffs “The criterion for accomplishing the transfer with no change in the terms of trade must then be MPM, + MPM, < 1.” What he means is that the condition is MPM, + MPM, = k where k is some constant less than one. In conclusion, let me say that it is easy to be critical of a text book, for all teachers have slightly different views of what is important and what is not, and many of the criticisms I have presented represent personal points of view, all or any which may not be widely shared. Many of the difficulties seem to be more fundamental than this, however, and I must conclude that I would neither use nor recommend this book as a text in international economics.
University
James Melvin of Western Ontario
Timothy King, Mexico: Industrialization and Trade Policies Since 1940. (London, Oxford University Press, 1970, pp. x, 160.) Since 1940, Mexico’s total output has grown at an average annual rate of 6.3 percent, this experience being one of the more interesting facts among less developed countries. Dr. King sets out to write a summary of the evolution of the main economic variables in the period 1940-65, and of some policies associated with this process. The most impressive fact during this period was the growth of the manufacturing sector at an average annual rate of 7.8 percent; however, the growth of the agricultural sector at a rate of 4.6 percent was also important in explaining total growth, since it entailed almost complete food self-sufficiency and a very large share of the commodity exports. The process of growth has been accompanied by an import substitution process, a “bad” distribution of income, inflation up to the late fifties, followed by remarkable price stability since then, and the persistence of very wide productivity differentials, which are more obvious between farmers and modern industry. In reviewing the overall policy framework, King notes that: (1) Mexico has developed a good mechanism to control the level of
365
discipline and the danger of asymmetrical inflationary dislocation of equilibrium levels themselves. (This is not to say that the argument is decisive, but appraising it would exceed the scope of a book review. One would have to compare, as Einzig does not, the inflationary tendencies of the free-rate system and those, demonstrated in both theory and experience, of the Bretton Woods system.) The book provides a fair sample of the level of argument commonly used against free exchange rates and reminds supporters of that system of the kinds of misunderstandings they must cope with. It will figure prominently for years on reading lists in international finance. Leland B. Yeager University of Virginia
Charles E. Staley, International Economics: Analysis and Issues. (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1970, pp. x + 285.) This book consists of two parts, the first, entitled International Trade, contains Chapters 1 to 14 (17 1 pp.) and the second, entitled The Balance of Payments, contains Chapters 15 to 22 (111 pp.). The book is written as a text or a supplement to a text, and makes no claims for originality, and I shall therefore evaluate in on those terms. Although the book is plainly meant as a text, it is not clear at what level the book is meant to be used, for there is a great deal of unevenness with respect to difficulty. The discussion ranges from very elementary treatments of the transformation curve and the construction of the factor box diagram, and descriptions of what indifference curves, isoquants, and IS and LM curves are, to the mathematical derivations of such things as the Metzler condition for a tariff to leave domestic prices unchanged (pp. 45-6, p. 11 1), the formula for the optimum tariff (p. 12 l), and the condition for a transfer to improve the terms of trade under both classical and Keynesian assumptions (p. 263 the author does not formally define and pp. 266-7). Furthermore, either the production function or the utility function, returns to scale are never formally defined, and none of the basic trade theorems are derived mathematically. In fact, the standard geometric demonstration of the Heckscher-Ohlin Theorem is not even included.
366
Book reviews
A major drawback of the book as a text are the diagrams, for there are many that are unclear, and at least seven that are incorrect. An initial annoyance is that figs. 2-l(b) and 2-2(b) (pp. 12 and 18) have been interchanged. Then on page 28 we are told that a tariff has reduced trade, but this is anything but obvious from the accompanying fig. 3-6. And in this figure, the before-tariff and after-tariff consumption points imply extremely strange demand assumptions. In figs. 4-7(a) and 4-7(b) (pp. 42-3) the student will have difficulty interpreting the broken lines as portions of offer curves. In fig. 4-8 (P. 44) a line OB, which the author calls the international terms of trade, has been included, but where this line comes from is impossible to tell, and indeed under the assumptions given could not be an equilibrium price line. And the discussion following this figure is not at all clear. In fig. 5- 1 (p. 53) in the factor box diagram one of the points of tangency between the two sets of isoquants (X=500, Y=lOO) is clearly not on the efficiency locus. In fig. 6-l (p. 68) although we are told that imports are equal to exports, they are clearly not equal in the diagram. In fig. 9-4 (p. 99) which shows the two offer curves for increasing returns to scale, one of the curves is incorrectly drawn at the origin. In fig. 13-2 (p. 153) while we are told that the isoquant shift represents a neutral technological change, it is not a neutral shift in the diagram. In fig. 14-1 (p. 162) a factor box diagram is used to show that with different wage-rental ratios in the two industries, the equilibrium point will not be on the efficiency locus, and fig. 14-2 shows the resulting transformation curve. Unfortunately, the transformation curve which would correspond to fig. 12- 1 would be convex to the origin while the one shown is concave. In the discussion of the optimum amount of foreign investment the diagram itself is correct (fig. 21- 1, p. 269) but the discussion of the diagram is not, and the argument stops well short of proving the point. Most of these points will not present problems to readers who are already familiar with the subject, but they can be of great annoyance to teachers and students. There are also instances where additional diagrams could have substantially increased the clarity of the argument. Another difficulty is that it is often not clear exactly what assumptions are being made, and the discussion shifts from one model to another with very little warning. For example, on page 60 where the author &scribes the Leontief technique for testing the HeckscherOhlin theorem, the reader is not reminded of the implications of the Leontief model for production and trade. And in Chapters 13 Growth,
Book reviews
361
Capital and Trade) and 21 (The Theory of Capital Movements) it is not made clear which assumptions of the Heckscher-Ohlin theorem are being retained and which are being released. In the second part of the book, particularly in Chapters 18, 19 and 20, it is not always made clear what things are being allowed to vary and what things are being held constant. In particular, it is often not clear whether prices can change, what assumptions are being made about capital flows, and whether or not a change in the balance of payments position is being allowed to change the money supply. There is also some confusion about when the situations being described diagrammatically are equilibrium situations and when they are not (as an example see pp. 214- 18). In Chapters 19 and 20, where flexible exchange rates are discussed the author makes such statements as “The exchange rate is a tool, like monetary and fiscal policy” (p. 246), and “Then the dollar is depreciated...” (p. 226), and one is never certain whether the rate is assumed to be market determined or is just adjustable. Uncertainty also surrounds the cause of these changes. In Chapter 20, pp. 246-S 1, it is not at all clear what kind of model the author had in mind, and in particular it is not apparent how he is changing the interest rate in the absence of a monetary sector. Turning now to some comments of a more subjective nature, I feel that the discussion of the determinants of trade could be substantially improved. I think that it is important to make it clear that here are, in general terms, five independent reasons why trade can take place, these being: differences in production functions, differences in endowments, increasing returns to scale, differences in demand conditions and departures from the conditions of competitive equilibrium. It is also important to distinguish those influences, including tariffs and transport costs, which can change the volume of trade but cannot themselves cause trade or change its direction. As a third category we have the assumptions which again cannot cause trade but which are necessary for the proofs of certain specific theorems. These include the absence of factor intensity reversal and the equality of the number of goods and factors. In my view the author has not been careful enough in distinguishing among these three types of assumptions. Indeed the proposition that differences in demand can cause trade is never explicitly introduced, even though Chapter 10 is concerned with tastes and the distribution of income. I am also unsatisfied with the treatment of the so-called Leontief Paradox (pp. 60-6). In light of the fact that there are at least five basic
368
Book reviews
and independent reasons why trade can take place, those who see significance in the Leontief results must either feel that all determinants except differences in endowments are absent, or that all other determinants would be completely dominated by endowment differences. There would seem to be no a priori reason for either of these views. It should also be noted that the Heckscher-Ohlin conclusions are consistent with at least two other explanations of trade if factors are mobile. 1 feel that the Heckscher-Ohlin Theorem could have been made more clear. The traditional diagram showing different transformation curves and the resulting trade pattern is introduced only once on page 27, and here, although the transformation curves are explicitly made quite different, the trade pattern that is shown is due to extreme differences in demand patterns, so that the Heckscher-Ohlin result is not observed. The fact that trade is due to demand differences is not brought out, and the statement that “specialization is less after trade than it was before” is likely to give rise to confusion. And in the discussion of the Heckscher-Ohlin Theorem we find the misleading statement that “If country 2 has a relative abundance of labor, it will be able to produce more labor-intensive good X for a given amount of Y than country 1 can.” (p. 5 1). It is disappointing that there is virtually no discussion of the basic gains from trade theorem, and 1 did not find the discussion of community indifference adequate. In the chapter on customs unions, the authors interprets Viners’ demand assumption as one of perfectly inelastic demand, and while one can perhaps justify such an interpretation, it is certainly not the traditional one. In the second part of the book, on the Balance of Payments, the discussion is almost always in terms of a deficit rather than a surplus, and students could get the impression that deficits are ‘bad’ and of surpluses is never surpluses are ‘good’, and the undesirability explained. The student could easily get the impression that quotas, tariffs and income changes are quite acceptable methods of adjusting the balance of payments. And in chapter 22 on liq_Gdity, it is not made sufficiently clear that a liquidity shortage is almost always just a symptom of an underlying balance of payments problem due to the lack of an automatic adjustment mechanism. In chapter 17 one could easily be led to conclude that changes in aggregate demand were part of the price-specie-flow mechanism, and the argument in this section is anything but clear (pp. 195-6). In the discussion we are not even told that a gold standard is being assumed and that the “rules” are being followed. (As a matter of fact, the gold
Book reviews
369
standard is never discussed.) Finally, in discussing the transfer problem, the author claims that with tariffs “The criterion for accomplishing the transfer with no change in the terms of trade must then be MPM, + MPM, < 1.” What he means is that the condition is MPM, + MPM, = k where k is some constant less than one. In conclusion, let me say that it is easy to be critical of a text book, for all teachers have slightly different views of what is important and what is not, and many of the criticisms I have presented represent personal points of view, all or any which may not be widely shared. Many of the difficulties seem to be more fundamental than this, however, and I must conclude that I would neither use nor recommend this book as a text in international economics.
University
James Melvin of Western Ontario
Timothy King, Mexico: Industrialization and Trade Policies Since 1940. (London, Oxford University Press, 1970, pp. x, 160.) Since 1940, Mexico’s total output has grown at an average annual rate of 6.3 percent, this experience being one of the more interesting facts among less developed countries. Dr. King sets out to write a summary of the evolution of the main economic variables in the period 1940-65, and of some policies associated with this process. The most impressive fact during this period was the growth of the manufacturing sector at an average annual rate of 7.8 percent; however, the growth of the agricultural sector at a rate of 4.6 percent was also important in explaining total growth, since it entailed almost complete food self-sufficiency and a very large share of the commodity exports. The process of growth has been accompanied by an import substitution process, a “bad” distribution of income, inflation up to the late fifties, followed by remarkable price stability since then, and the persistence of very wide productivity differentials, which are more obvious between farmers and modern industry. In reviewing the overall policy framework, King notes that: (1) Mexico has developed a good mechanism to control the level of