Tuesday, May 15, 2012

The two economies and trade

A rift is opening up. The first, globalized sector is producing a lot of the productivity gains, but it is not producing a lot of the jobs. The second more protected sector is producing more jobs, but not as many productivity gains. The hypercompetitive globalized economy generates enormous profits, while the second, less tradable economy is where more Americans actually live.

David Brooks, NYTimes  "The two economies"

Relative to most economic professors, Brooks is stating some basic trade theory with a twist which is filled with complexity. The price of labor used in traded goods goes up as demand increases. Higher productivity also makes goods more competitive and able to compete in the global markets

Productivity will also increase from the increased competition; however, non-traded good will not be unaffected by world prices. The US, given its size, is not an open economy. It is becoming more open, but the size of the traded sector is smaller than most countries. Non-traded goods will be less sensitive to global productivity shifts. Hyper-competitive markets will not generate more profits. By definition, these are markets which will have less profits.


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