A GENERAL EQUILIBRIUM THEORY OF INTERNATIONAL CAPITAL FLOWS.

The purpose of this paper is to develop a new approach to the theory of international capital movements. There has been much effort expended on the study of capital movements, but little has been done to develop a general equilibrium framework within which the causes and effects of capital movements can be analysed.[2] This may be the result of the classical premise that factors are immobile internationally, or of the factor-price equalisation theorem, which makes all factor movements (including capital) unnecessary when free trade exists,[a] However, Meade (23) pp. 348-93, has taken great care to emphasise that the conditions for factor-price equalisation may not be met, and Kenen (16) has devised a clever theory of capital and trade which allows for factor-price equalisation for land and labour, but not for capital. Hence, capital flows continue to exist in theory as well as fact, and there is a need for a general theory that illustrates the determination of the equilibrium direction and magnitude of these flows, as well as the causes behind them. [ABSTRACT FROM AUTHOR]