The World Economy

 

Developing countries are in a tough spot because Q is barely large enough to feed the population. If any substantial investment is made in infrastructure, technological improvements, etc., consumption expenditure is likely to be reduced to the point that people starve to death. Developing countries also face acute labor shortages despite their large populations, because very few people are trained in any industrially useful skills. In addition, even if some level of investment is possible and the stock of capital goods expands, this expansion is often offset (or more than offset) by increase in population. Foreign investment in capital goods is the only meaningful solution presented in the textbook. The resulting debt problem is not mentioned.

Some people think the world is coming to an end for various reasons, some of them quite compelling. Other people don’t believe the world will actually end, mostly because the of the pessimists assumptions of ‘if present trends continue.’ The question is: Given the fact of technological improvement, is the limit to available resources finite or infinite? Will we eventually ‘run out’ of something important (clean air, energy), or will we always be able to dream up new ways to provide for our needs?

Ecologists are concerned with the damage that the industrialized economies are doing to the natural world. The main focus of concern is currently global warming. If global warming continues, waer levels will rise, wiping out low-lying cities and in some cases entire nations. The developed world might have the resources to build new cities, but the developing world would become even poorer. Of course, there is a great deal of controversy about why and even whether large-scale global warming is occurring, and predicting the outcome decades or centuries in the future is most likely futile. And stopping pollution costs money. Various other ecological disaster scenarios exist: The runaway viral plague, the meteor, etc.

Increasing globalization and increasing ease of transfer in currency markets means that massive amounts of money can shift between economies overnight or even hour-by-hour. What’s more, investors are generally subject to the same overall motivations. When massive blocs of investors start selling a particular currency for whatever reason, we have the modern currency crisis, as currently being experienced in Asia. Some economists now argue that the present system of currency trading has produced such large and unacceptable fluctuations that all nations should adopt ‘fixed’ exchange rates where each nation’s currency is pegged to that of a principal player like the dollar, yen, mark or pound (or perhaps Euro). This changes government ploicy in all nations: For the leaders, stability of exchange becomes a major macroeconomic goal, and for the followers, monetary policy becomes much more difficult to execute to control the domestic economy.

The European Union and the Euro currency are still under formation and the outcome is unknown. As with any other massive unknown outcome, you can predict all sorts of scary and disastrous results. Japan is also having some trouble. And watch out for China. The end.