Facilitating a higher level of sustainable income by restoring comparative advantage as the principle governing international trade

For a decade now, ecological economists have been pointing out the harmful effects of highly mobile capital flows and the consequent governing of international trade by the principle of absolute advantage. While it is possible for a direct macro constraint on capital flows to restore the more desirable principle of comparative advantage, it is likely to impede exchange rate flexibility. This is undesirable. Fortunately, the dilemma can be overcome by establishing, at the national level, a system of foreign exchange management that: (a) requires all international transactions to pass through a so-called IMPEX facility; (b) requires all foreign currency to be exchanged for IMPEX dollars; and (c) constrains all spending on imports by the availability of "earned" foreign exchange held in the form of IMPEX dollars. To offer theoretical support for the IMPEX system, an IS-LM-BP-EE model is employed to analyse the relationship between international trade and sustainable income under a different set of international trading conditions ¾ one where capital is highly mobile (the status quo position); another where the international mobility of capital is restricted by the IMPEX system of foreign exchange management (the Lawn position). Use of the IS-LM-BP-EE model reveals that sustainable income is higher under the Lawn position.