Page 647 - The Principle of Economics

CHAPTER 29 OPEN-ECONOMY MACROECONOMICS: BASIC CONCEPTS 665
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.
SOURCE: The New York Times, September 26, 1994, p. A17.
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.