Balance-of-Payments Theory and the United Kingdom Experience by A.P. Thirlwall

By A.P. Thirlwall

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If, however, the intervention is unsuccessful, and the currency has to be devalued (or depreciates further under a system of flexible exchange rates), the monetary Balance-of-Payments Accounting 37 authorities stand to lose heavily. K. Exchange Equalisation Account lost nearly £400 million in its attempt to prop up the forward value of sterling before the devaluation of sterling in November 1967. K. foreign-exchange crises have not been predominantly of a purely speculative nature but the result of interest arbitrage arising from the spread between the spot and forward rates of exchange.

S. supply curve of imports. S. goods is infinitely elastic (so Balance-ofPayments Theory and UK. K. S. goods. Imports may be either competitive or non-competitive with domestic goods. Competitive imports fill the gap between the domestic demand for a commodity and its domestic supply. For most of these goods the demand for imports will be more elastic than the demand for the goods that the imports compete with (importables) because as the domestic price of the goods falls not only does domestic demand increase but also supply contracts.

Second, income adjustments frequently took place, at times of bad harvests for example, reducing or eliminating deficits that would otherwise have arisen and necessitated the export of gold. Third, larger and larger capital flows occurred in response to interest-rate differences, helping to fmance balance-of-payments deficits on current account without the export of gold. The fixed exchange-rate system imposed by the old gold standard ultimately broke down in 1931, largely because the rules of the gold standard were not being adhered to.

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