C H A P T E R 2 9
O P E N - E C O N O M Y M A C R O E C O N O M I C S : B A S I C C O N C E P T S
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Total expenditure on the economy’s output of goods and services is the sum of
expenditure on consumption, investment, government purchases, and net exports.
Because each dollar of expenditure is placed into one of these four components,
this equation is an accounting identity: It must be true because of the way the vari-
ables are defined and measured.
Recall that national saving is the income of the nation that is left after paying
for current consumption and government purchases. National saving (
S
) equals
Y
C
G.
If we rearrange the above equation to reflect this fact, we obtain
Y
C
G
I
NX
S
I
NX.
Because net exports (
NX
) also equal net foreign investment (
NFI
), we can write
this
equation as
S
I
NFI
Saving
Domestic
Net foreign
investment
investment.
actually happened in recent years, it is al-
most completely untrue.
Rapidly growing Third World econ-
omies have indeed increased their ex-
ports of manufactured goods. But today
these exports absorb only about 1 per-
cent of First World income. Moreover,
Third World nations have also increased
their imports.
Overall, the effect of Third World
growth on the number of industrial jobs
in Western nations has been minimal:
Growing exports to the newly industrial-
izing countries have created about as
many
jobs as growing imports have
displaced.
What about capital flows? The num-
bers sound impressive. Last year, $24
billion flowed to Mexico, $11 billion to
China. The total movement of capital
from advanced to developing nations
was about $60 billion. But though this
sounds like a lot, it is pocket change in a
world economy that invests more than
$4 trillion a year.
In
other words, if the vision of a
Western economy battered by low-wage
competition is meant to describe today’s
world, it is a fantasy with hardly any ba-
sis in reality.
Even if the vision does not describe
the present, might it describe the future?
Well, growing exports of manufactured
goods from South to North will lead to a
net loss of northern industrial jobs only if
they are not matched by growth in ex-
ports from North to South.
The authors of the report evidently
envision a future of large-scale Third
World trade surpluses. But it is an un-
avoidable fact of accounting that a coun-
try that runs a trade surplus must also
be a net investor in other countries. So
large-scale deindustrialization can take
place only if low-wage nations are major
exporters
of capital to high-wage na-
tions. This seems unlikely. In any case, it
contradicts the rest of the story, which
predicts huge capital flows into low-wage
nations.
Thus, the vision offered by the
world competitiveness report conflicts
not only with the facts but with itself. Yet
it is a vision that a growing number of the
world’s most influential men and women
seem to share. That is a dangerous
trend.
Not everyone who worries about
low-wage competition is a protectionist.
Indeed, the authors of the world compet-
itiveness report would surely claim to be
champions of free trade. Nonetheless,
the fact that such ideas have become re-
spectable . . . suggests that the intellec-
tual consensus that has kept world trade
relatively free, and that has allowed hun-
dreds of millions
of people in the Third
World to get their first taste of prosper-
ity, may be unraveling.
S
OURCE
:
The New York Times,
September 26, 1994,
p. A17.
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PA R T E L E V E N
T H E M A C R O E C O N O M I C S O F O P E N E C O N O M I E S
C A S E S T U D Y
ARE U.S. TRADE DEFICITS
A NATIONAL PROBLEM?
You may have heard the press call the United States “the world’s largest
debtor.” The nation earned that description by borrowing heavily in world fi-
nancial markets during the 1980s and 1990s to finance large trade deficits. Why
did the United States do this, and should this event give Americans reason to
worry?
To answer these questions, let’s see what these macroeconomic accounting
identities tell us about the U.S. economy. Panel (a) of Figure 29-2 shows national
saving and domestic investment as a percentage of GDP since 1960. Panel (b)
shows net foreign investment as a percentage of GDP. Notice that, as the identi-
ties require, net foreign investment always equals national saving minus do-
mestic investment.
The figure shows a dramatic change beginning in the early 1980s. Before
1980, national saving and domestic investment were very close, and so net for-
eign investment was small. Yet after 1980, national saving fell dramatically, in
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