Basic Economics of Trade Agreements (Krugman)
July 1, 2011 Leave a comment
The case for free trade is about microeconomics, about raising efficiency. There’s no particular reason to think that trade liberalization is good for fixing problems of inadequate demand. I mean, you learn in Econ 101 that aggregate spending is Y = C+I+G+X-M; that is, consumer spending, plus investment spending, plus government purchases, plus exports, minus imports. Trade liberalization raises X, but it also raises M. For any individual county it can go either way; for the world as a whole it’s a wash, since total exports equal total imports.