Much of the external policy debate in Britain during in the 1920s and early 1930s hinged around the reduction in trade surpluses (and occasional increase in the trade deficit) consequent to an increase in imported goods. We feel therefore that it is important to test empirically and econometrically as to whether there were economic factors leading to an expected increase in imports and hence a continuing reduction in the current account surplus (or a rise in deficits). Further, it is also important to judge whether exports were suffering due to export prices becoming less competitive due to fluctuations in the real exchange rate.

The objective of this paper is two-fold: 1) to estimate econometrically an import demand function for Britain during the inter-war years and to assess the role of various aggregate economic variables (such as GDP or relative price inflation) that may have affected the volume and value of imports and 2) to estimate empirically the extent of pass-through whereby the external movement of the domestic currency affects the domestic price level and the level of price inflation or deflation in the economy due to external impact; this in turn affects export price and therefore the volume of exports.

This research allows us to explain some of the underlying long-term structural factors behind the British concern at its fall as the world’s leading trading power as well the short-run expediency to increase the trade balance through the imposition of the General Tariff of 1932.