oh. 2i INTERNATIONAL DISEQUILIBRIUM 345

lending in tlie new position. Thus the net nationalgain (or loss) to our country, in respect of these twoelements in the calculation, is

s.L' - E 2 (p! -p 2 ) + F 2 (^ - q 2 ).

I see no presumption in favour of this quantitybeing positive rather than negative. In the case of acountry for which the elasticity for investment athome is large and the elasticity of demand for exportsand imports is small, one would expect it to benegative. The orthodox doctrine that the volume offoreign investment under a free play of forces isalways at a social optimum for the investing countryis probably based on the assumption that a very smallfall in the prices of exports will develop an adequateincrease of B.

The above makes no allowance, on the one hand,for the subsequent effects of foreign investment inturning the terms of trade the other way when interestcomes to be paid, or for any indirect advantagesaccruing to the lending country through the develop-ment of the world’s resources—-which advantages,however, would accrue to it equally if the foreigninvestment were undertaken by some other country.On the other hand, it also makes no allowance for theinevitable losses of any transition. As a rule, money-earnings will not fall to the necessary extent imme-diately ; with the result that there will be an inter-vening period when the market-rate of interest exceedsthe natural-rate, so that, total investment falling shortof savings, business losses and unemployment ensue.

If the above piece of analysis is applied to Ger-many ’s “transfer problem” in the payment of repara-tions, there is no set-off corresponding to the higherrate of interest earned or to the subsequent improve-ment in the terms of trade; so that the loss to Germany occasioned by the strain of establishing the new equi-librium is measured by E 2 (p x -p 2 ) - F 2 (^ 1 - q 2 ), together