This paper studies trade theory for the case of a continuum of goods, two factors, two countries, and Cobb-Douglas demand functions. If factor endowments are similar, factor price equalization obtains and geographic patterns of production are indeterminate; nonetheless the effects of changes in factor endowments on prices and welfare in each country are well defined. Factor price equalization does not obtain if factor endowments are far apart, and the geographic pattern of specialization is then determinate. The effects of changes in endowments on the range of goods produced in each country and on prices of goods and factors are analyzed for this case, and the elasticity of substitution in production is shown to play an important role in determining comparative static outcomes.

This paper develops a reinterpretation of the devaluation analysis in a popular model of international trade developed by Charles Bickerdike, Joan Robinson, and Lloyd Metzler. It has come to be known as the elasticity approach.1 That model, developed in terms of independent markets for imports and exports, has been criticized for its apparent lack of general equilibrium properties. The assumptions underlying the model have remained by and large implicit and vary across users, and the integration of this analysis with the and macroeconomics has never been demonstrated. All this is very much recognized and indeed application of the model is consistently accompanied by appropriate partial equilibrium, impact effect, or upper bound caveats. These shortcomings notwithstanding, the model continues to enjoy substantial popularity in policy discussions and interpretations of current events, in empirical work, and in recent textbooks in the field of international economics.' The BRM model is likely to remain the preferred tool in the analysis of trade balance issues along with the foreign trade multiplier model. It is therefore interesting and useful to enquire into its formal general equilibrium implications. This paper is concerned with one such interpretation involving a nontraded goods sector and a well-defined government policy that makes the analysis consistent with the absorption approach. While it may well be possible to generate alternative interpretations, the present analysis would seem to have the advantage of simplicity while at the same time pointing out the essential properties that would have to be satisfied by alternative treatments. In Section I a brief review of the BRM approach is offered. In Section II that approach is interpreted in terms of a simple model with nontraded goods and constant terms of trade. The implicit assumptions of the BRM model are brought to the f oreground by an explicit consideration of the market for home goods, the equilibrium conditions, and the role of the relative price of nontraded goods.3 Following that analysis, Section III considers the subsidiary issues that are raised by variable terms of trade. The notion of total elasticities is given an interpretation in Section IV where we return to the composite traded good model to explore alternative assumptions about absorption policies.

Financial factors have been assigned strategic importance in economic development. But very different factors have been isolated in the respective experiences: in Asia unrepressed financial markets in mobilizing saving and allocating investment have been given prominence. In Latin America the central question is the role of inflationary finance, the scope for deficits to enhance growth and, increasingly, the feedback from high and unstable inflation to poor economic performance. This paper reviews and contrasts the two approaches and concludes that the strong claims for the benefits of financial liberalization are not supported by evidence. Financial factors are important, but probably only when financial instability becomes a dominant force. The scope for inflationary finance is small and the risks are larger than commonly accepted. When hyperinflation takes over and foreign exchange crises disrupt the price system, and shorten the economic horizon to a week or a month, normal economic development is suspended. Moreover, difficult to reverse capital flight puts savings outside the home economy. Attention should focus on these extreme cases and explore deeper the thresholds at which financial factors become dominant and the channels through which this occurs. Superior growth performance, in this perspective, may be more a reflection of adaptability than financial deepening.

This paper highlights the institutional features of the inflation process and contrasts two stabilization efforts in 1964-66 and in 1986.The inflation process in Brazil is highly institutional. It does not resemble hyperinflations where pricing and wage setting are geared to the exchange rate by the hour, making it possible to stop inflation by simply containing money creation and fixing the exchange rate. The two stabilization programs demonstrate that an incomes policy is an essential ingredient to non-recessionary stabilization. But they also show that demand restraint is inevitable if disinflation is to be viable. The 1964 program was gradualist and two-handed, relying on the supply side on wage repression. The 1986 plan was a heterodox shock treatment centered around an uncompromising price freeze and paying insufficient attention to the need for fiscal restraint.

The model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling. A partial-equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official, depreciation-adjusted interest differential, as well as seasonal factors associated with tourism. Expectations of future exchange rate changes, under rational expectations, are shown to affect the current level of the black market premium. The empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern. The magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios.