3°6
LLOYD A. METZLER
(1.3) the following equation for a country undertaking a balanced-budget contraction :
(1.8) y = s(y + 0) — ©■
     A minor problem arises here in the treatment of government expenditures for it appears that such expenditures are negative. What meaning can be attached to negative government expenditures? The problem could have been avoided by starting with some initial, positive level, 0, of expenditures and assuming that this level is reduced by an amount, 0 (< 0). For the purpose to which I expect to apply the balanced-budget theorem, however, even this small degree of complication is unnecessary; the government’s contribution to expenditures, in the transfer case, is an indirect one, arising through the influence of the transfer upon the balance of trade; this indirect influence may well be negative. Consider, for example, the position of the receiving country. Under a flexible exchange system, an inflow of transfer funds must be balanced by an import surplus of the same amount and the import surplus is equivalent, as far as national output is concerned, to indirect, negative government expenditures.
     Once again, differentiating (1.8) with respect to 0 and collecting
                   A
                 dy
coefficients of , we find
             A
(j-9)    -% (1 - s') = (5' ~ t)*
from which it follows that
(1.10)
dy
7/b
I
Equation (1.10) says that national output falls as government expenditures are reduced in a balanced-budget contraction; and the reduced output is exactly equal to the reduced expenditures.
     Since y = y + 0, we have the following equation for the movement of factor income :
¡*5
+ 1=0
Factor income remains unchanged despite the reduction of output or employment; reduced earnings from lower employment are exactly offset by increased subsidies.
     These basic and well-understood ideas concerning the effects of a