Within the context of a world where some goods may be nontraded and some factors may be internationally mobile, this paper analyzes the conditions under which trade in factors can replace trade in goods in the presence of tariffs or taxes. crucial issue regarding the perfect substitutability between trade in goods and trade in factors turns out to be whether the sufficient conditions for international equalization of prices of goods and factors are exactly met, not met, or met in excess. THE TOPIC OF international equalization of factor prices has been widely discussed in the literature, starting with P. A. Samuelson in 1948 [4]. However, the treatment of the problem has consistently been restricted to the case where all goods are being traded and all factors are immobile between countries. A breakthrough came with Ken-Ichi Inada's article The Production Coefficient Matrix and the Stolper Samuelson Condition [2]. There he accepts that some goods may not be traded between countries, and then shows at what level, and how many, nominal factor rewards governments should fix through intervention in order to obtain international equalization of prices of goods and factors (IEPGF). In Section 1 of this paper we extend Inada's results to include the possibility of international factor mobility, thus eliminating the necessity of government fixing of factor rewards in order to get IEPGF. We will thus be looking for sufficient conditions for IEPGF when some goods are nontraded and some factors are internationally mobile. In Section 2 we analyze some of the implications of models where the sufficient conditions for IEPGF which we found in Section 1 are either not met, exactly met, or met in excess. In particular, we will show that the results obtained by Robert Mundell [3] about perfect substitutability between goods movements and factor movements are due to the fact that he is working with an overdetermined model, in the sense that the sufficient conditions for IEPGF are met in excess. We will be only concerned with the case where the total number of goods equals the total number of factors. It is assumed that each country produces the same n goods with the help of the same n factors under linear homogeneous production functions which are identical for all countries. All n factors are used in some positive amount in the production of each good. Of the n goods, k < n are traded;

Following the pioneering papers by John M. Fleming and Robert Mundell, a substantial literature has accumulated incorporating the Keynesian analysis of the effects of monetary and fiscal policies in the open economy under flexible exchange rates and perfect capital mobility. The general policy result which followed from this line of research has been the verification of the presumption that monetary policy is an effective stabilization tool under flexible exchange rates, while the ability of fiscal policy to affect the level of economic activity varies inversely with the degree of international capital mobility. The key to the results lies in the differential effect of both policies on the direction of the induced capital flows and thus on exchange rate movements. The latter in turn affect the trade balance and aggregate demand. To my knowledge, however, all authors have either been concerned with the derivation of short-run or multipliers describing the effects of monetary and fiscal policy on the level of economic activity or have otherwise ignored the longer-run effects of policy-induced changes in the level of international indebtedness and the service of that debt. Abstracting from growth and persistent shocks, it is reasonable to assume that, given enough time following the policy change, individuals will adjust their international portfolios of assets to the new desired proportions such that capital flows eventually cease. When long-run portfolio equilibrium is thus reached, the service account deficit of the balance of payments must necessarily be equal to the net export surplus (the trade balance), the exchange rate being the natural instrument through which this long-run external balance condition is achieved. It is therefore natural to conceive of the long-run level of the service account as the primary determinant of the long-run trade balance. In view of the above and the fact that in a Keynesian-type economy the trade balance plays a crucial role in the determination of the level of economic activity through its effects on aggregate demand, it follows that a longerrun analysis of the effects of monetary and fiscal policy cannot logically ignore the consequences of those policies for the service account. In this paper I intend to explore the longrun implications of induced changes in the level of the service account for the effects of monetary and fiscal policy; in the process of doing so, I will develop a simple model whose basic structure resembles that of Fleming and Mundell although it is modified to explicitly incorporate the stocks of domestic and foreign securities held. In order to provide the reader with a clearer perspective on the problem at hand, let us first discuss the impact effects of monetary and fiscal policy in the context of the standard short-run model. Given the Keynesian structure of the economy either policy will increase domestic income (and employment) only to the extent that it succeeds in expanding aggregate demand of which the trade balance is one component. At a given exchange rate, expansionary fiscal policy would increase aggregate demand but at the expense of a higher domestic interest rate (the crowding out effect); *Columbia University. I am indebted to G. Borts, L. Girton, and D. Henderson for their comments and suggestions. A preliminary version of this paper was written while I was visiting scholar at the Division of International Finance of the Board of Governors of the Federal Reserve System. The views expressed here should not be interpreted as necessarily those of the Board.

The purpose of this paper is to examine the interaction between the exchange rate and the trade balance within the framework of the portfolio approach to exchange rates and rational expectations. In a simplified linear version, it is shown that the difference between the spot exchange rate and its long-run equilibrium value is proportional to the current level of the trade-balance surplus normalized by the current stock of foreign-asset holdings. Therefore, the analysis provides some evidence in favor of the presumption that surplus country should have an undervalued currency (relative to its long-run level). The basic idea behind the analysis is that, in a world of high capital mobility,current flow payments disequilibria can be accommodated by capital flows without need, in principle, for exchange rate movements. Only if the public expects lasting change in the required rate of capital flows will exchange rates adjust, since in this case the expected time path of net foreign assets will be significantly affected.

The purpose of this paper is to examine the interaction between the exchange rate and the trade balance within the framework of the portfolio approach to exchange rates and rational expectations. In a simplified linear version, it is shown that the difference between the spot exchange rate and its long-run equilibrium value is proportional to the current level of the trade-balance surplus normalized by the current stock of foreign-asset holdings. Therefore, the analysis provides some evidence in favor of the presumption that surplus country should have an undervalued currency (relative to its long-run level). The basic idea behind the analysis is that, in a world of high capital mobility,current flow payments disequilibria can be accommodated by capital flows without need, in principle, for exchange rate movements. Only if the public expects lasting change in the required rate of capital flows will exchange rates adjust, since in this case the expected time path of net foreign assets will be significantly affected.