72

A TREATISE ON MONEY

BE. II

fall relatively to the Index of the local PurchasingPower of Money in a great many countries.

A further phenomenon of considerable significancefor economic interpretation is the movement for anycountry of that part of its International Price-Levelwhich enters into its trade as imports relatively tothat part which enters as exports. The ratio betweenthese movements yields a derivative index of therelative prices of Exports and Imports or, as we mayexpress it, of the Terms of Trade . It measures thequantity of home goods which have to be offered inorder to obtain a unit of foreign goods. This Indexis peculiarly exposed, as Professor Bowley has shown,to the difficulties of changing composition due to thefrequent and rapid fluctuations in the proportions inwhich given classes of goods are exported or imported.It was first introduced in Giffen ’s calculations forthe Board of Trade (Pari. Papers, 1878-79, 2247, andsubsequent years). 1

The Purchasing Power Parity Theory of theForeign Exchanges, which has been much discussedin recent years, is in its purest form no more than are-statement of the proposition given above to theeffect that the rates of foreign exchange between twocurrencies move in the same way as the ratio of anInternational Index expressed in the prices of onecountry to the same Index expressed in the prices ofthe other country.

This is, indeed, little more than a truism, whichmight not have received so much attention as it has,even supported by Professor Cassel’s authority, if ithad not been extended—illegitimately in my opinion—to the Purchasing Power of Money itself. Since theprices of imports and exports react on other prices,

1 For discussions of this Index in the ease of Great Britain vide Bowley,Economic Journal, vol. xiii. p. 028; Keynes , Economic Journal, vol. xxii.p. 030, vol. xxxiii. p. 470; Beveridge, Economica , Feb. 1924, p. I ; Robertson,Economic Journal, vol. xxxiv. p. 280; Taussig, Economic Journal, vol. xxxv.

p. 1.

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