CH. 21

INTERNATIONAL DISEQUILIBRIUM

343

(iii.) The Net National Advantages of ForeignInvestment

We have seen that, when a change in the termsof trade occurs as a concomitant of increased foreigninvestment, this is due to the factors of production inthe lending country having to change over to a kindof output in which they are less effective (having re-gard both to technical efficiency and to the variouselasticities of demand involved) relatively to thefactors of production in the borrowing country, thanthey were in respect of the output which they wereproducing before the change-over. That is to say,their marginal efficiency is reduced for obtainingforeign-trade products by exchange. This means thatthe terms of exchange alter to their disadvantage,not only in respect of that part of their foreign tradewhich corresponds to the increased volume of foreigninvestment, but over the whole field of their foreigntrade—assuming, of course, competitive conditions.Since, in accordance with our definitions, we measurethe output of the factors which are working to ex-change exports for imports by the quantity of importswhich are obtainable in exchange, it follows that thetotal output of the factors of production in the lendingcountry is reduced by an amount corresponding tothe loss involved in giving more exports for a givenquantity of imports or in replacing goods previouslyimported by goods produced at home.

In the new position of equilibrium actual ratesof money-earnings will be reduced and real earningswill also be reduced, though to a less extent. Butreal efficiency-earnings will be unchanged, since in aposition of equilibrium efficiency-earnings in terms ofmoney and the price-level must necessarily have

E

changed in the same proportion. In other words, q—