ALBERT

Notes: The question how currency devaluation would affect the net terms of trade has been debated for many years, chiefly because one wanted to know what this change in the terms of trade would do to real national income, and also how this income change in turn would alter the trade balance. Yet, changes in the net terms of trade can have determinate effects on real income only if the productivity of resources is unchanged, and devaluation usually affects productivity through the resource reallocation which it induces; indeed, where there is no such reallocation the net terms cannot be affected by devaluation. Hence, even if the net terms should be adversely affected by devaluation, this may be associated with an improved use of resources which raises productivity enough to cause real national income to be increased rather than reduced. A deterioration of the net terms of trade may sometimes be a pre-condition for an increase in real national income as well as for an improvement in the balance of trade. The presumption is strong that the devaluation of an overvalued currency will lead to a more efficient allocation of resources. The contention that a deterioration of the net terms of trade will normally cause a reduction of the real national income and a worsening of the balance of trade by equal amounts must surely be rejected.The conceptual identity between real output and real income cannot be maintained when the terms of trade change. Clear analysis of the problems under discussion requires distinctions between “real output”, “real intake”, and “real income”. If the idea of a “change in the real balance of trade” is to make sense, it must relate to the difference between changes in real domestic output and real domestic intake. The socalled “primary burden” of devaluation may be interpreted as the fall in real intake when real output and terms of trade are unchanged; if there is any “secondary burden”, it need not be another reduction in real intake, but rather a reduction in real income. Since real output and real income may move simultaneously in different directions, it becomes necessary to ask on which of them the spending propensities—investment, consumption, imports, hoarding—are based. Depending on the incidence of changes in “income”, it will sometimes be real output, sometimes real income that will determine expenditures. Yet in most algebraic models there is just a simple Y for both.