The external economy

William Mitchell

Chapter 5 in Modern Monetary Theory, 2023, pp 94-124 from Edward Elgar Publishing

Abstract: This chapter will examine the importance of trade and finance in macroeconomics. We will consider the implications for nations of the "Nixon Shock" in August 1971 and show that this shifted the focus from financial constraints on government spending to real resource constraints. We will examine the advantages of flexible exchange rates. Consistent with that shift, the MMT approach to trade focuses on the real terms of trade, which constructs exports as an opportunity cost that nations incur to gain the material advantages embodied in imports. We examine the implications of external deficits and the associated financial flows, including the accumulation of financial claims denominated in a nation's currency by foreign exporters. We will demonstrate that governments can always thwart currency speculators. Finally, we examine the case for increased self-sufficiency in manufacturing in the face of trends in deindustrialisation and the capacity of governments to attenuate global shifts in production.

Keywords: Economics and Finance (search for similar items in EconPapers)
Date: 2023
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