The purpose of this paper is to examine the effects of international movements of labour and capital upon the commodity terms of trade. The development of the modern theory of international trade, initiated by E. Heckscher and B. Ohlin has enabled us to relax the classical assumption of complete immobility of factors among different countries, and to analyse the international movements of goods and factors within the same theoretical framework. Thus, both Heckscher and Ohlin emphasized the substitutive relationship between international trade and factor movements. But the effects of international factor movements upon the international terms of trade seem to have attracted comparatively less attention. Although the question known as the “transfer problem” was subject to detailed investigation, it is not concerned with the movement of factors of production per se.

Professors J. E. Meade and H. G. Johnson independently considered international factor movements from the long-run point of view, and presented rigorous analyses of their effects upon the commodity terms of trade. Meade dealt with the international migration of labour in order to give a theoretical basis to the regulation of migration, whereas Johnson made an ingenious use of Rybczynski's theorem to analyse the effects of international transmissions of productive power upon the terms of trade. The present paper attempts to push their analyses a little further by developing a general formulation of the problem within a neo-Heckscher-Ohlin trade model.

Traditional Keynesian trade multipliers ignore intermediate goods. Professors Harrod and Johnson have considered them in a limited sense; both used a one-sector model. The objects of this paper are: to consider the effect of intermediate goods on the trade multiplier by use of a matrix trade multiplier; to consider their effect on the rate of growth of both exports and outputs of commodities; and to discuss the stability conditions of a balanced growth rate in a simple dynamic Leontief model.

Harrod took intermediate goods into account only as a deduction from exports or investments when he considered the multiplier process. Johnson considered them more explicitly. In his model, an economy uses a primary factor of production, say labour, and foreign-made intermediate goods to produce consumption goods. However, the economy does not use home-produced intermediate goods, and all home-produced goods are consumption goods (so that the economy exports only consumption goods). In a more realistic model, the autonomous increment of demand for investments or exports would create two kinds of multiplier processes: one through the increment of demand for home-produced consumption goods, the other through the demand for home-produced intermediate goods. Each industry uses a primary factor of production and both home-made and foreign-made intermediate goods. Consumers demand both domestic and foreign consumption goods.

During the 1950's and 1960's the high level of foreign investment in Canada has provoked a continuing public debate, but for the most part the controversy has raged unrestrained by any quantitative information on the potential benefit of foreign capital. The lack of data is understandable, for in attempting an estimate one encounters a multitude of conceptual and empirical problems that militate against any sort of precision.

Although it is impossible to be exact, I believe that the importance of the problem warrants making some rough guesses, and that is the task of this paper. My tools will be crude and there will be many compromises with reality, but by choosing my assumptions so that they impart an upward bias to my estimates, I can at least attempt to establish an upper bound to the true benefit of foreign investment. Even if the numerical estimates are not too reliable, making them forces us to separate the many issues related to the problem and to speculate on their relative importance.

It must be noted initially that the models of this paper consider only the benefits conferred by the inflow of real resources financed by foreign capitalists, and they do not take account of the technical knowledge and skilled personnel often accompanying direct foreign investment. My first model assumes that some new knowledge is implemented by foreign investment, but no more than would be implemented by the same amount of domestic investment. I consider neither the possibility that the technical change associated with foreign investment proceeds at a faster pace than that associated with domestic investment, nor the possibility that techniques introduced by foreigners have external effects. I take this narrow approach not only because it would be virtually impossible to isolate the impact of technical change introduced by foreigners but also because I do not think that foreign investment is necessary to the international transmission of technical information.

In Britain, a meeting of the Privy Council means a meeting of the Queen and three or more Privy Counsellors (at least four must be summoned, but only three need be present). Such meetings are, of course, summoned for purely formal purposes, but they are not infrequent. It used to be blandly assumed that similar meetings of the Queen's Privy Council for Canada had taken place only very rarely indeed. Successive articles by Professor Mallory showed that at least in the early years after Confederation this was not so.

Professor MacNutt, on the other hand, has suggested that, until Lord Lome's assumption of the Governor-Generalship, meetings of the Council with the Governor present were the rule rather than the exception, and that they were much more than merely formal. He says: “Shortly after his arrival in Ottawa, Lorne was astonished by an invitation to sit in Council with [his ministers] as public business was discussed. He was shown the high-backed, decorated gubernatorial chair in the cabinet room in the east block where Dufferin had sat like a Stuart monarch and sometimes summarily influenced debate. Lorne refused; most informed men were confused and mystified.”