Saving and Investment in a Global Economy

Saving and Investment in a Global Economy

Saving and Investment in a Global Economy

Saving and Investment in a Global Economy

Synopsis

"The emergence of large trade imbalances among the industrial countries during the 1980s - particularly the massive deficit of the United States and the surpluses of Germany and Japan - has led to growing disenchantment with the international economic system. But while many critics point to unfair trade practices as the cause of these imbalances, others contend that this emphasis is misplaced. In this provocative book by one of the nation's leading economists, Barry Bosworth argues that trade disparities are not the result of external infractions, but rather a reflection of domestic failures. He shows that the United States, for example, with its large government budget deficit and low rate of private saving, must borrow abroad to finance its investment. Similarly, trade surpluses of countries such as Japan reflect a surplus of national saving over domestic investment, rather than restrictive trade practices. Bosworth explains that large trade imbalances became possible in the 1980s because of the development of an international capital market that greatly reduced the barriers to borrowing and lending across national borders. The result is an international system in which national economies are closely linked through international capital markets as well as through trade in goods and services. Using data from the major industrial countries, Bosworth highlights the process by which changes in domestic rates of saving and investment lead to changes in interest rates, exchange rates, and trade balances. He first examines why national saving and investment have fallen throughout the industrialized world. He then focuses on the determinants of exchange rates and trade flows, and considers whether the wide fluctuations in exchange rates are a cause for concern or simply an integral part of the international adjustment to the divergent patterns of national saving and investment." Title Summary field provided by Blackwell North America, Inc. All Rights Reserved

Excerpt

The emergence during the 1980s of large trade imbalances among the major industrial economies focused public attention on America's relationship to the economies of other countries. Exchange rates, current account balances, and other aspects of the international economy have become central to the design and conduct of economic policy.

The integration of the global economy through increased trade in goods and services has been under way for several decades. But the opening of national capital markets, with the consequent increase in movements of financial capital across borders, is more recent. The shift to a system of flexible exchange rates has made understanding the linkages between the domestic economy and the economies of other countries difficult.

In this study Barry Bosworth examines the causes of the trade imbalances of the 1980s. While much of the public discussion has emphasized microeconomic causes--specifically, what Americans perceive as the unfair trade practices of other countries--this analysis argues that the imbalances can be traced to macroeconomic changes in saving and investment in the major industrial economies.

Focusing on those economies, the author shows how changes in domestic saving and investment lead to changes in interest rates, exchange rates, and trade balances. He also examines the reasons for the decline in rates of national saving and investment throughout the industrialized world, and considers whether the recent wide fluctuations in exchange rates are a cause for concern or simply an integral part of the international adjustment to divergent patterns of national saving and investment.

Research for this book was financed in part by a grant from the Tokyo Club Foundation for Global Studies. Suzanne M. Smith provided extensive research assistance. The author is grateful to Rudiger Dornbusch . . .

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