Page 646 - The Principle of Economics

664 PART ELEVEN THE MACROECONOMICS OF OPEN ECONOMIES
IN THE NEWS
Flows between
the Developing South and the Industrial North
WILL THE WORLD’S DEVELOPING COUN- tries, such as those in Latin America, flood the world’s industrial countries with cheap exports while refusing to import goods from the industrial coun- tries? Will the developing countries use the world’s saving to finance invest- ment and growth, leaving the indus- trial countries with insufficient funds for their own capital accumulation? Some people fear that both of these out- comes might occur. But an accounting identity, and economist Paul Krugman, tell us not to worry.
Fantasy Economics
BY PAUL KRUGMAN
Reports by international organizations are usually greeted with well deserved yawns. Occasionally, however, such a report is a leading indicator of a sea
change in opinion.
A few weeks ago, the World Eco-
nomic Forum—which every year draws an unmatched assemblage of the world’s political and business elite to its confer- ence in Davos, Switzerland—released its annual report on international compet- itiveness. The report made headlines be- cause it demoted Japan and declared America the world’s most competitive economy.
The revealing part of the report, however, is not its more or less mean- ingless competitiveness rankings but its introduction, which offers what seems to be a very clear vision of the global eco- nomic future.
That vision, shared by many power- ful people, is compelling and alarming. It is also nonsense. And the fact that this nonsense is being taken seriously by many people who believe themselves to be sophisticated about economics is it- self an ominous portent for the world economy.
The report finds that the spread of modern technology to newly in- dustrializing nations is deindustrializing high-wage nations: Capital is flowing to the Third World and low-cost produc- ers in these countries are flooding world markets with cheap manufactured goods.
The report predicts that these trends will accelerate, that service jobs will soon begin to follow the lost jobs in manufacturing and that the future of the high-wage nations offers a bleak choice between declining wages and rising un- employment.
This vision resonates with many people. Yet as a description of what has
flow of goods and services and the international flow of capital are two sides of the same coin.
SAVING, INVESTMENT, AND THEIR RELATIONSHIP TO THE INTERNATIONAL FLOWS
A nation’s saving and investment are, as we have seen in Chapters 24 and 25, cru- cial to its long-run economic growth. Let’s therefore consider how these variables are related to the international flows of goods and capital, as measured by net exports and net foreign investment. We can do this most easily with the help of some simple mathematics.
As you may recall, the term net exports first appeared earlier in the book when we discussed the components of gross domestic product. The economy’s gross domestic product (Y) is divided among four components: consumption (C), investment (I), government purchases (G), and net exports (NX). We write this as
Y 􏰀 C 􏰁 I 􏰁 G 􏰁 NX.