According to the World Competitiveness Report 1994, with freer markets, Third World nations are now able to attract capital and technology from the advanced nations. As a result, they can achieve productivity close to Western levels, while paying low wages. Hence, the low wage Third World nations will run huge trade surpluses, creating either large scale unemployment or sharply falling wages in the advanced nations. Comment on this apocalyptic scenario.
Despite the persuasiveness of this vision of the future, it makes no economic sense. The reason lies in the basic national income accounting identity presented below:
Savings - Investment = Exports - Imports
The World Competitiveness Report says that capital will flow from Western nations to low-wage nations, enabling the latter nations to invest more than their domestic savings by ...
This posting gives a detailed solution to the student's question.