THE BALANCE OF PAYMENTS of Denmark was in a precarious position in 1950. In October it was apparent that the year’s deficit on goods and services account would exceed DKr 800 million; and it seemed that the deficit for 1951 would be even greater, in view of the sharp increase in the prices of raw materials and other imports, for which domestic demand was likely to be inelastic.
The Government, with the agreement of the major opposition parties, embarked in November 1950 upon a general program of anti-inflationary fiscal measures in order to cope with the worsening international payments situation. The program included additional taxation on consumption and incomes and forced savings which required graduated contributions estimated to amount in all to DKr 140 million. The Danish National Bank had raised its discount rate to 5 per cent in November, after having already raised it from 3½ to 4½ per cent in July; and the commercial banks also had raised their interest rates.
In 1951, despite a further worsening of the terms of trade, the balance of payments showed considerable improvement. The deficit on goods and services account, which was DKr 829 million in 1950, was reduced to DKr 337 million in 1951. The improvement—which fell within the range of DKr 300–500 million estimated by the Danish Government in November 1950 when its anti-inflationary program was announced—was particularly marked in the second half of the year, when the goods and services account showed a slight surplus (DKr 80 million), compared with a deficit (DKr 288 million) in the second half of 1950. The purpose of this paper is to examine the improvement that is attributable to the anti-inflationary policy followed by the authorities, and the improvement due to other factors.
Mr. Tsiang, economist in the Special Studies Division, is a graduate of the London School of Economics, and was formerly Professor of Economics in the National Peking University and the National Taiwan University. He is the author of The Variations of Real Wages and Profit Margins in Relation to Trade Cycles and several articles in economic journals.
If the terms of trade are computed on the basis of import and export price indices rather than unit value indices, those for the fourth quarter of 1951 are 17 per cent below the average for 1950 and 9 per cent below those for the fourth quarter of 1950.
Gross national product increased by approximately 11 per cent from 1950 to 1951, and wholesale prices by 17 per cent from December 1950 to December 1951.
See Sidney S. Alexander, “Effects of a Devaluation on a Trade Balance”, Staff Papers. Vol. II, pp. 263–78 (April 1952).
Danmarks Nationalbank, Report and Accounts for 1951, p. 20.
Letter from the National Bank of Denmark to the Royal Bank Commissioner, the Rt. Hon. Ove Weikop, M.P., Kt., reproduced on p. 36, Danmarks National-bank, Report and Accounts for 1951.
Total supply of money is defined in this connection to mean the sum of the note circulation of the National Bank, the folio deposits of the banks with the National Bank, and Treasury bills in circulation.
Bacon exports increased by approximately 8 per cent and meat exports by 17 per cent in weight.
Danmarks Nationalbank, Report and Accounts for 1951, p. 7.
The value of imports of raw materials for industrial production has been deflated by wholesale prices of raw materials for other purposes than food production in Denmark; the increase in these prices happens to coincide closely with the increase in the average value of imports of raw materials for industrial production in the United Kingdom. The value of imports of raw materials for agricultural production has been deflated by the wholesale prices of raw materials for food production in Denmark. The value of imports of fuel has been deflated by the index of the unit value of fuel imports for Norway, which buys from abroad approximately the same types of fuel that are imported by Denmark. Imports of capital goods have been deflated by the index of the average value of exports of metals and engineering products of the United Kingdom. Imports of consumers’ goods have been deflated by the index of the average value of textile products and other consumption types of exports of the United Kingdom. The weighted average of the indices used corresponds quite closely to the Danish official index of the unit value of total imports.