A NOTE ON THE CAPACITY TO TRANSFORM AND THE WELFARE COSTS OF FOREIGN TRADE FLUCTUATIONS.

The purpose of this note is to attack the underlying problem by examining the relationship between unpredictable fluctuations in export prices [1] and fluctuations in national income and welfare within the framework of the standard neo-classical model of international trade. Specifically the paper deals with what we thought at first to be the reasonable conjecture that a country which possessed a high "capacity to transform" would suffer less from unpredictable export instability than a country with a rigid economy, since the flexible economy would be able to adjust and adapt to changing circumstances, whereas the rigid one would not (i.e., we thought that the variability of welfare associated with a flexible economy would be less than that of a rigid economy for a given variability in export prices). To the extent that this were true a country might mitigate the harmful consequences of uncertainty by choosing a flexible economic structure, even in it involved some loss in average income. For some ranges of price fluctuations the flexible economy had greater variability in income than the rigid economy; for some the opposite was true. In presenting these results we wish to emphasise the very limited nature of the framework used to approach this problem. Our analysis applies to a very specific way of defining flexibility and welfare, and though the approach is an interesting one, it is only one of many possible ways of defining the problem. In the last analysis it 0........... serves more to raise questions than to answer them. [ABSTRACT FROM AUTHOR]