INTERNAL — EXTERNAL BALANCE AND RELATIVE SIZE: FURTHER COMMENTS

In his commentary on our recent contribution, Rodney Thom (1976) singles out three points for discussion. He maintains that our model ignores (1) the relative size of economy under analysis; (2) the interdependence of inflation rates between countries operating under fixed exchange rates; and (3) the dependence of the level of exports upon foreign real income. The failure to take these factors into proper account, he contends, may render our conclusions irrelevant.