344

A TREATISE ON MONEY

BK. IV

the rate of real efficiency-earnings, will be unchanged;

E

but 0, the output, and yy, the actual real earnings of

the factors of production, will both be reduced andin the same proportion, corresponding to the loss ofefficiency of the factors of production in their newsituation as compared with their efficiency in the old.

On the other hand, the efficiency of capital engagedin foreign investment is increased by reason of thehigher rate of interest earned. Whether on balancethere is a national gain or loss as a result of the in-creased proportion of investment abroad depends ona comparison between the prospective gain of increasedfuture income from foreign investment and of im-proved terms of trade when this income is being paidand the immediate loss occasioned by the deteriora-tion in the terms of trade whilst the foreign investmentis taking place; i.e. on the elasticity of demand forinvestment at home in terms of the rate of interestand the elasticity of the world’s demand for our goodsand our demand for theirs.

Subject to the simplifying assumptions thatearnings in the export trades are the same as inother trades, that there are constant returns toindustry within the range of variation in question,and that the total volume of saving is unchanged,the loss through the fall in prices of exports relativelyto those of imports is measured by E 2 (p 1 -^ 2 )-where E 2 is the volume of exports and F 2of imports in the new position; 1 p 1} q x the prices ofexports and imports respectively in the old position ;and p 2 , q 2 their prices in the new position. On theother hand, the gain in the advantage of current foreignlending by reason of the rise in the rate of interest ismeasured by s.I/, where s is the proportionate risein the rate of interest and 1/ the amount of foreign

1 This ignores loss of consumer’s surplus through substitution of home-produced goods for imports.