TY  - JOUR
AU  - Krugman,Paul
TI  - Adjustment in the World Economy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2424
PY  - 1988
Y2  - March 1988
UR  - http://www.nber.org/papers/w2424
L1  - http://www.nber.org/papers/w2424.pdf
N1  - Author contact info:
Paul R. Krugman
Department of Economics
Princeton University
Woodrow Wilson School
Princeton, NJ  08544
Tel: 609/258-4570
Fax: 609/258-2809
E-Mail: pkrugman@princeton.edu
AB  - There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes.  In fact shifts in demand and real exchange rate adjustment are necessary couplets, not substitutes.  The essential reason for this complementarity is that a much higher fraction of a marginal dollar of US than of foreign spending falls on US output.  As a result, a redistribution of world spending away from the US leads to an excess supply of US goods unless accompanied by a decline in their relative price.  Although some economists believe that the integration of world capital markets somehow eliminates this problem, this is a fallacy that confuses accounting identities with behavior.  The paper also addresses a number of relates issues, such as the role of budget deficits in determining domestic demand and the effectiveness of nominal exchange rates changes in producing real depreciation.
ER  -