Thanks, Peter. So what you're saying is that the difference between
price levels and inflation rates is crucial. The classical adjustment
mechanism presumed by comparative-advantage stories does not work
to balance trade by adjusting prices. But the aggregate demand
effect (P in US rises relative to P in rest of world --> fall in
quantity demanded for tradeable elements of US GDP) doesn't
work because rises in relative US prices involve changes in
relative inflation rates, which leads to exchange rate changes.
This means that even though relative nominal prices between the
US and the rest of the world rose, the relative real prices (cor-
rected for the exchange rate) did not, so that there is
no international substitution effect. Right?
in pen-l solidarity,
Jim Devine BITNET: jndf@lmuacad INTERNET: [EMAIL PROTECTED]
Econ. Dept., Loyola Marymount Univ., Los Angeles, CA 90045-2699 USA
310/338-2948 (off); 310/202-6546 (hm); FAX: 310/338-1950
