The Trade Effects of the 1971 Currency Realignments.

This article reveals the effect of the 1971 dollar devaluation on the trade balance of the United States. The year 1971 saw a major realignment of exchange rates among the world's important currencies. The basic cause of these changes was the continuing deterioration of the U.S. trade and payments position, and their proximate cause the massive speculation against the dollar throughout the year and suspension of convertibility by the United States in August. The changes in exchange rates against the dollar -- the dollar price of foreign currencies -- are expected to initiate a major swing toward surplus in the U.S. trade balance and consequently to reduce substantially the surpluses of some other countries. In the first two major sections of the paper the analytics of revaluation are discussed, flrst from the point of view of a single revaluing country, with attention to the difliculties concerning export supply elasticities and the "pass-through" issue; and then from the standpoint of multilateral trade, using a model originally developed by Paul Armington. The next three sections focus on quantitative estimates of the long-run effects of the realignment. The first reports an extension of the Armington model, under several assumptions about the relevant demand, substitution, and supply elasticities; it develops a figure of a bit less than $8 billion for the swing in the U.S. trade surplus from a 1971 base, and consistent estimates for the whole trade matrix. Next comes a brief discussion of the empirical model for U.S. bilateral trade developed by Stephen Magee, which provides estimates of the U.S. row and column of the world trade matrix.