Based on your interpretation of the text you are about to read, determine whether each statement is right or wrong.

Part-I

“Trade, Jobs, and Wages” in Pop Internationalism, by Paul Krugman, Chapter 3, pp.-35-37.

The MIT Press, 1996.

The real wage of the average American worker more than doubled between the end of World War II and 1973. Since then, however, those wages have risen only 6 percent. Furthermore, only highly educated workers have seen their compensation rise; the real earnings of blue-collar workers have fallen in most years since 1973.

Why have wages stagnated? A consensus among business and political leaders attributes the problem in large part to the failure of the U.S. to compete effectively in an increasingly integrated world economy. This conventional wisdom holds that foreign competition has eroded the U.S. manufacturing base, washing out the high-paying jobs that a strong manufacturing sector provides. More broadly, the argument goes, the nation's real income has lagged as a result of the inability of many U.S. firms to sell in world markets. And because imports increasingly come from Third World countries with their huge reserves of unskilled labor, the heaviest burden of this foreign competition has ostensibly fallen on less educated American workers.

Many people find such a story extremely persuasive. It links America's undeniable economic difficulties to the obvious fact of global competition. In effect, the U.S. is (in the words of President Bill Clinton) "like a big corporation in the world economy" -- and, like many big corporations, it has stumbled in the face of new competitive challenges.

Persuasive though it may be, however, that story is untrue. A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country's economic difficulties. The manufacturing sector has become a smaller part of the economy, but international trade is not the main cause of that shrinkage. The growth of real income has slowed almost entirely for domestic reasons. And -- contrary to what even most economists have believed -- recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

The fraction of U.S. workers employed in manufacturing has been declining steadily since 1950. So has the share of U.S. output accounted for by value added in manufacturing. (Measurements of "value added" deduct from total sales the cost of raw materials and other inputs that a company buys from other firms.) In 1950 value added in the manufacturing sector accounted for 29.6 percent of gross domestic product (GDP) and 34.2 percent of employment; in 1970 the shares were 25.0 and 27.3 percent, respectively; by 1990 manufacturing had fallen to 18.4 percent of GDP and 17.4 percent of employment.

Before 1970 those who worried about this trend generally blamed it on automation -- that is, on rapid growth of productivity in manufacturing. Since then, it has become more common to blame deindustrialization on rising imports; indeed, from 1970 to 1990, imports rose from 11.4 to 38.2 percent of the manufacturing contribution to GDP.

Yet the fact that imports grew while industry shrank does not in itself demonstrate that international competition was responsible. During the same 20 years, manufacturing exports also rose dramatically, from 12.6 to 31.0 percent of value added. Many manufacturing firms may have laid of workers in the face of competition from abroad, but others have added workers to produce for expanding export markets.

To assess the overall impact of growing international trade on the size of the manufacturing sector, we need to estimate the net effect of this simultaneous growth of exports and imports. A dollar of exports adds a dollar to the sales of domestic manufacturers; a dollar of imports, to a first approximation, displaces a dollar of domestic sales. The net impact of trade on domestic manufacturing sales can therefore be measured simply by the manufacturing trade balance -- the difference between the total amount of manufactured goods that the U.S. exports and the amount that it imports. (in practice, a dollar of imports may displace slightly less than a dollar of domestic sales because the extra spending may come at the expense of services or other nonmanufacturing sales. The trade balance sets an upper bound on the net effect of trade on manufacturing.)

Item 2 - Economic factors do not support the notion that the U.S. firms are unable to compete in a global economy.

Based on your interpretation of the text you are about to read, determine whether each statement is right or wrong.

Part-I

“Trade, Jobs, and Wages” in Pop Internationalism, by Paul Krugman, Chapter 3, pp.-35-37.

The MIT Press, 1996.

The real wage of the average American worker more than doubled between the end of World War II and 1973. Since then, however, those wages have risen only 6 percent. Furthermore, only highly educated workers have seen their compensation rise; the real earnings of blue-collar workers have fallen in most years since 1973.

Why have wages stagnated? A consensus among business and political leaders attributes the problem in large part to the failure of the U.S. to compete effectively in an increasingly integrated world economy. This conventional wisdom holds that foreign competition has eroded the U.S. manufacturing base, washing out the high-paying jobs that a strong manufacturing sector provides. More broadly, the argument goes, the nation's real income has lagged as a result of the inability of many U.S. firms to sell in world markets. And because imports increasingly come from Third World countries with their huge reserves of unskilled labor, the heaviest burden of this foreign competition has ostensibly fallen on less educated American workers.

Many people find such a story extremely persuasive. It links America's undeniable economic difficulties to the obvious fact of global competition. In effect, the U.S. is (in the words of President Bill Clinton) "like a big corporation in the world economy" -- and, like many big corporations, it has stumbled in the face of new competitive challenges.

Persuasive though it may be, however, that story is untrue. A growing body of evidence contradicts the popular view that international competition is central to U.S. economic problems. In fact, international factors have played a surprisingly small role in the country's economic difficulties. The manufacturing sector has become a smaller part of the economy, but international trade is not the main cause of that shrinkage. The growth of real income has slowed almost entirely for domestic reasons. And -- contrary to what even most economists have believed -- recent analyses indicate that growing international trade does not bear significant responsibility even for the declining real wages of less educated U.S. workers.

The fraction of U.S. workers employed in manufacturing has been declining steadily since 1950. So has the share of U.S. output accounted for by value added in manufacturing. (Measurements of "value added" deduct from total sales the cost of raw materials and other inputs that a company buys from other firms.) In 1950 value added in the manufacturing sector accounted for 29.6 percent of gross domestic product (GDP) and 34.2 percent of employment; in 1970 the shares were 25.0 and 27.3 percent, respectively; by 1990 manufacturing had fallen to 18.4 percent of GDP and 17.4 percent of employment.

Before 1970 those who worried about this trend generally blamed it on automation -- that is, on rapid growth of productivity in manufacturing. Since then, it has become more common to blame deindustrialization on rising imports; indeed, from 1970 to 1990, imports rose from 11.4 to 38.2 percent of the manufacturing contribution to GDP.

Yet the fact that imports grew while industry shrank does not in itself demonstrate that international competition was responsible. During the same 20 years, manufacturing exports also rose dramatically, from 12.6 to 31.0 percent of value added. Many manufacturing firms may have laid of workers in the face of competition from abroad, but others have added workers to produce for expanding export markets.

To assess the overall impact of growing international trade on the size of the manufacturing sector, we need to estimate the net effect of this simultaneous growth of exports and imports. A dollar of exports adds a dollar to the sales of domestic manufacturers; a dollar of imports, to a first approximation, displaces a dollar of domestic sales. The net impact of trade on domestic manufacturing sales can therefore be measured simply by the manufacturing trade balance -- the difference between the total amount of manufactured goods that the U.S. exports and the amount that it imports. (in practice, a dollar of imports may displace slightly less than a dollar of domestic sales because the extra spending may come at the expense of services or other nonmanufacturing sales. The trade balance sets an upper bound on the net effect of trade on manufacturing.)

Item 2 - The author actually begs the question: how a rapid growth of productivity in the manufacturing sector can be responsible for the stagnation in wage levels?

II Parte

“The Real Business-Cycle Approach” in Principles of Macroeconomics, by Joseph Stiglitz, pp. 652-653.W.W.Norton, 1993

The position of the real business-cycle theorists is the easiest to explain. As has been pointed out, they believe that the source of economic fluctuations is exogenous shocks the economy, to which the economy quickly and efficiently responds. The fluctuations do not require government intervention because the market economy will give the best possible solution. Even the variability in income to which fluctuations give rise is not a problem; people acting rationally will have put aside savings to protect themselves against hard times. And unemployment, according to real business-cycle theorists, is more apparent than real. Individuals who want jobs could get them if only they lowered their expectations as to wage and nonpecuniary remuneration. It is better to encourage them to do this and move quickly to new jobs than to prolong the agony by allowing them not to face the facts.

While monetary policy is unnecessary to real business-cycle economists, it is also largely ineffective. If firms see that the government has increased the money supply, they simply increase prices proportionately. And individuals and firms protect themselves against the effects of change in the price level through indexing. There are no real effects. The real money supply and the real credit supply are unchanged. A distinctive lesson of the real business-cycle view is that while the government can offer no relief, it can also do no harm.

In the form just presented, the real business-cycle theory may seem too extreme -- monetary policy has no effect, inflation has no consequences, unemployment is not important. Still, many economists believe that its basic lesson is still correct: by and large, economic fluctuations are a result of real disturbances, to which the economy adjusts relatively efficiently, and government policy is unlikely to speed or improve the adjustment.

While monetary policy has no effect according to the real business-cycle theory, fiscal policy does. The effect is simple and straightforward: government expenditures divert resources from private consumption to the government. But fiscal policy does not have any effect on the real unemployment rate since there is, in real business-cycle theorists’ perspective, no unemployment.

This view of fiscal policy is different from that found in traditional Keynesian analysis. To Keynesians, the government expenditure level has a direct effect in stimulating the economy. Taxes have exactly the opposite effect, and much of their focus is on the difference between expenditures and revenues -- the deficits. Deficits stimulate the economy. Real business-cycle theorists deny this. They believe that only the expenditures matter; deficits are as irrelevant as monetary policy. If the government borrows to pay for current expenditures (deficit spending), taxpayers know that eventually they will have to pay, so they set aside the appropriate amount. Savings rise to match the deficit. The failure of household savings to rise in response to the huge government deficits of the past decade has provided the most telling criticism against this aspect of real business-cycle theory.

The text you just read brings some important differences between the Real Business Cycle (RB-C, for short), the monetarists and the Keynesians. Check if the statement below is right or wrong.

Item 1 - According to the author the failure of householders savings to rise to match the deficit of the past decade represents a valid criticism of the RB-C’s point of view.