The Transfer Problem

The transfer problem is a perennial problem in the theory of international trade, which has given rise to a voluminous literature. Recently Professor Samuelson has surveyed this literature in an exhaustive investigation of the classical two-country two-goods transfer problem,' in the course of which he has derived criteria for determining the direction of change in the transferring country's terms of trade. The purpose of the present note is, first, to demonstrate that Professor Samuelson's criteria may be derived by a simple argument requiring no geometrical or mathematical analysis ;2 second, to raise some doubts about the sharpness of the contrast between Professor Samuelson's terms-of-trade criteria in the cases of real and artificial obstacles to trade, and to present general criteria which comprise both cases. The argument incidentally provides a new support for the classical presumption that the terms of trade will turn against the transferor, and sheds some light on the influence of transport costs on the problem. The simplest approach to the transfer problem is to consider the effect of the transfer on the demand for the transferor's export good at constant (pre-transfer) prices. The effect of a transfer will be to decrease the transferor's demand, and increase the transferee's demand, for the transferor's export good.3 If the net effect is an increase in the quantity of the transferor's good demanded, the transferor's terms of trade will have to turn in its favour to restore trade equilibrium, and vice versa. This result follows from two assumptions of the model: identity of total income and expenditure, from which it follows that (at constant prices) an increase in demand for one commodity is accompanied by a reduction in demand for the other, so that we need only consider the demand for one commodity; and market stability, from which it follows that excess demand for a commodity must be eliminated by an increase in its relative price. Since the relationship between the prices of the same good in the two markets is assumed to remain fixed in each of the cases studied, it does not matter in which market the terms of trade are measured; and since changes in production will depend on changes in the terms of trade, it does not matter whether we assume production in each country fixed or variable

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• Transport Costs in the Pure Theory of International Trade

  Rodney E Falvey•The Economic Journal•1976

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