Export Instability and Economic Development by Macbean Alasdair;

Author:Macbean, Alasdair;
Language: eng
Format: epub
ISBN: 614875
Publisher: Taylor & Francis Group

THE NURKSE THESIS

Source: Nurkse, 1958: p. 249. The argument is presented first on pp. 149–51 and then restated more precisely on pp. 247–50.

For a shift in demand from DD to D’D’, supply expands from M to N, and total foreign-exchange earnings can be shown by a rectangle bounded by sides of length ON and NP2. If supply were held fixed, price would rise to P1 which lies below the equal revenue curve on which P2 is situated, OM–MP1 must be smaller than ON–NP2. Hence a fixed supply leads to a smaller gain from this rise in demand and price. Analogously a fall in demand shown by a shift from D’D’ to DD leads to exchange earnings OM–MP; while if supply were fixed at N, earnings would be ON-NP3 which falls below the equal revenue curve through P and hence is smaller.

The crucial assumptions for Nurkse’s conclusion are: (1) demand must be elastic above the point of the intersection of the D curve with the supply schedule and inelastic below it; (2) fluctuations must be the result, at least mainly, of change in demand; (3) relatively short-run elasticities of supply must be at least greater than zero and preferably rather high; (4) lagged responses of supply must not exist or must be amenable to controls.

The necessity for the first assumption can be easily verified from the diagram. If demand elasticity is less than unity above P2, the D’D’ curve will lie above the equal curve so that holding supply constant when demand increases will actually result in the greater earnings. Equally, if demand should be elastic below the point P, the DD curve will lie above the equal revenue curve through P; and if demand declines, a constant supply will again yield the higher earnings.

Nurkse defends this assumption by arguing that no rational country would charge a price for its exports which would move export operations on to the inelastic portion of the demand schedule, for it can gain by simply reducing exports and raising prices. He says, ‘A country would almost certainly not operate to the right of PM, since in that region the DD schedule has an elasticity of less than one, so that the country could increase its export income by reducing the quantity over that range of the demand schedule.’ (1958: p. 248.) At most, this only takes care of inelasticity. It does not rule out the possibility that the DD schedule may be elastic in all of the range relevant to the problem. For many countries the demand facing their commodity exports is almost certain to be highly elastic simply because they supply such a small share of a relatively homogeneous market. But if demand is elastic, a downward or leftward shift of the D’D’ curve to DD would yield higher foreign-exchange earnings to a policy which fixed supply at N than to one which allowed supply to adjust back to M.

There are many other complicating features of this assumption. The policymakers have to know what

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