358

INTERNATIONAL TRADE

Then it can be laid down that, if the quantity of money be doubled
in a given country, and if prices be doubled in consequence, the rate
of foreign exchange will settle down in the long run to a figure in
accord with the change in its prices relative to prices in other
countries. But if something happens to disturb the conditions of
demand for exports or imports; or if invisible items enter which
disturb the barter terms of trade — then the purchasing-parity
doctrine does not hold. And if both sets of forces vary together,
if there be changing monetary conditions, and also changes in the
conditions of demand, and (or) in the invisible items, the doctrine
does not hold. The exchange rate then may vary within limits
that are potentially wide.

APPENDIX

In the following pages I work out in detail, and illustrate by figures, the lines of
analysis followed in the body of the chapter, the object being to show with the
explicitness of figures how the rates of exchange shape themselves, how prices
shift in the trading countries, how sales and purchases are carried out in the
moneys of the countries, how the barter terms of trade work themselves out.
The reader to whom this sort of treatment seems otiose can omit.
The figures have not always been carried out meticulously to the last fraction.
 Here, as in other numerical illustrations used in the present volume,
results in round numbers have been thought to suffice.
Let us suppose, as before, a situation in which the United States and Great
Britain each have inconvertible paper. The American paper is more abundant
(relatively to the traditional gold currency of the two countries) than the
British. The rate of exchange with which we begin is £1 = $10.00; or $1 = 2
shillings. Following the existing and long-established practice, we may still
quote the rate in the way first stated, that is, so many dollars to the pound.
And we may assume, as in previous illustrative figures, that all the exchange
transactions are carried on in New York.
The successive stages in a series of representative situations may now be
followed.
(1) Begin by assuming a stage of simple equilibrium, in which the only
dealings between the two countries arise from merchandise transactions. Let
cotton stand for the goods exported by the United States to Great Britain, and
steel for the goods which Great Britain exports. Suppose that

U. S. sends to G. B. 50 million cotton @ 4.84. = £1,000,000
G. B. sends to U. S. 50 million steel @ $0.20 = $10,000,000