Re: stiglitz

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

You wrote:
The European demand for "bananas" is a function of the high rate of
unemployment in Euroland If instead of double digit unemployment in Europe,
the unemplyment rate was say 1-3 per cent (as it was forty or fifty years ago)
do you doubt that the demand for bananas would be much higher in Europe -- and
the Caribbean countries would export many more bananas. Under the current
system, international trade and exchange rate system is the way open economies
try to push off their unemployment to either their trading partners or other
countries that produce similar products or to botjh tradfing partners and
other countries's industries.

>We are not talking about the current system -- we are talking about a system
that assures each nation that there is no international payments constraint
that prevents the nation from employing all the available resources to produce
something worthwhile for the community.
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In its standard form exports of say country A are a function of external demand and the rest of the world´s income elasticity of demand for A´s exports (I will refer to this variable in what follows as export elasticity) and the ratio of domestic to foreign prices.

So if a country, say country A, exports commodities, the rate of growth of its exports will be a function of the rate of growth of external demand and the export elasticity  (leaving outside relative prices). In the present case if, the export elasticity is equal or greater than one, the country´s commodity exports will increase with the growth in external demand (income). Assume for simplicity the export elasticity is equal to one. Then if the country´s A major export market is Europe and if Europe undertakes expansionary policies, country´s A exports will increase proportionally. Moreover if the country´s A elasticity for its exports aproximates Europe´s elasticity for its own exports, the rates of growth will converge over time.

However if the income elasticity of Europan demand for A´s export (export elasticity)  is less than 1 and A´s income elasticity of demand for imports is greater than 1, then the country is poised for an external trade imbalance. In your proposal, country A need not undertake restrictive measures.  Unless A changes its export composition and is able to change its elasticity parameters (export elasticity) there is no guarantee that it will eventually correct its external imbalance. In fact A may have a continuous external imbalances. Eventually A has to adjust. Should it alter its standard of living? And how?.

Esteban Perez