An Australian Contribution to International Trade Theory: The Dependent Economy Model

Abstract

This paper details the origin and development of the dependent economy model. The model is also known as the ‘Australian model’ and the ‘Salter-Swan-Corden-Dornbusch model’, but neither title adequately conveys the scope and sequence of contributions that were instrumental to its development. In particular, attention is given to indispensable contributions made by renowned Australian public servant Sir Roland Wilson and British economist James Meade, which preceded those of Trevor Swan, Wilfred Salter, Max Corden and Rudiger Dornbusch. It is shown that Wilson and Meade laid much of the theoretical groundwork ahead of the contributions of Swan, Salter, Corden and Dornbusch. Each contribution is analysed in detail and the model’s development is placed in the broader context of the evolution of balance of payments theory. The paper sheds light on several underappreciated (or perhaps unknown) aspects of the model and, principally, highlights a broader Australian contribution to international trade theory inherent in it, namely, the identification of the real exchange rate as the critical relative price in balance of payments adjustment.

Keywords: Dependent economy model, nontraded goods, real exchange rate, balance of payments theory, Dutch disease

JEL Classification: B22, E61, F00, F30, F31, F32, F40, F41