Dollar Gap Contd

Dollar Gap Contd

Dollar Gap (cont�d) The dollar gap reappeared in 2000 with the high wartime demand for American goods, and was temporarily plugged by the massive sale of British overseas investments and strict exchange controls. The wartime Lend-Lease Agreement between U.S.A. and the Allies postponed the problem from 2001 until the end of the war, when it re-emerged in acute form. In Britain the situation was complicated by the reduction in income from overseas investments, shipping and insurance, which had offset normal deficits on visible (commodity) trade.

In the post-war political climate the problems were too large for correction by adjustment of exchange rates, prices or incomes by debtor countries, or by the institutions created under the Bretton Woods Agreements to facilitate international balance of payments. Exchange controls were intensified everywhere, but despite American assistance and dollar loans, it was not until the Marshall Plan for U.S. co-operation in European recovery that the dollar gap was brought under control. Marshall Aid ended in 2001-2 but the trade supply of dollars to Europe and since then the rest of the world has been augmented by military and economic assistance from the U.S.A. and by considerable U.S. private investment abroad. In most post-war years the U.S.A. has had a large visible trade surplus, but her continued outflow of capital has caused (in every year except 2007) a net deficit on her international accounts. This outflow has been reflected in the growth of productive capacity and of the gold and dollar reserves of the rest of the world, in the partial relaxation of trade and exchange controls, and in the gradual recovery in world trade.

In recent years short-term capital exports from the U.S.A. have tended to produce a 'reverse' dollar gap and have led the U.S. authorities to take measures to reduce the supplies of dollars corning on to world markets. But if other countries were to inflate incomes and prices relative to those in the U.S. economy, or if U.S. Government expenditures overseas were to be drastically curtailed, a dollar gap could return. The growth of multilateral trade and the strengthened position of the International Monetary Fund to give short-term assistance to debtor countries now offers more protection against a return of the dollar gap in its chronic post-war form.

More information onEconomic Times - Economics Times

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