Economic Expansion and the Terms of Trade

The analysis of interrelations between economic expansion and the terms of trade cannot boast of a long, uninterrupted history. Here and there one may come across a few scattered references to terms of trade in studies of the incidence of technological innovations on the growing country’s net gain from growth in the works of Mill [18], Edgeworth [9], Bastable [2] and Ohlin [19]; of the desirability of the policy of protection in the wake of technical improvements in what is known as the German tariff controversy;† of the celebrated transfer problem sparked primarily by Thornton [22] and Hume [14] and subsequently resurrected by Taussig [21] and Keynes [17] (in the famous debate over the German reparations problem); finally, of the impact of international capital movements featuring in the works of Fanno [10], Iverson [15] and Ohlin [19]. But the avowed application of the tools of general equilibrium analysis to the diagnosis of the behaviour of the terms of trade consequent upon growth is only a post-war phenomenon. Whatever ingenuity the problem of shifts in inter-country commodity prices elicited from the economist in the pre-war era was, with a few exceptions,‡ incidental; it arose not because of an interest in the application of economic theory to the problem of economic development, which itself never figured prominently in neo-classical writings, but was due to the economist’s preoccupation with some other issues of current importance wherein considerations of the terms of trade were unavoidable.