Profits, Interest, and Trade in a Keynes-Ricardian Perspective

In classical economics, gross profits resolve into two parts: interest, and net profit. The latter resembles Ricardian differential rent. The presence of net profit is almost inevitable in the short run. Yet the modem theories of balance of payments and of exchange rate abstract from the net profit. This paper presents a model where the interest rate and the net profit play their respective roles. The conditions f or international equilibrium then turns out to be more stringent than hitherto suspected: the elasticity of the average gross profit curve, at the point of equilibrium, has to ho the same across countries. The model is applied to explore certain aspects of the Latin American debt crisis where the nationalization of private external debts, budget deficit, rising interest rate, failing investment, and recession have all got linked up in a vicious circle. As for other ramifications of our model we surmise the conjectures that the IS curve in open economy macroeconomics may have to be redrawn; and that the observed volatility of exchange rates may be a reflection, in part, of the difficulty of the economic systems to satisfy the stringent conditions of international equilibrium.