Abstract
Textbook theory ignores capital flows: trade determines exchange rates and specialisation. Approaches taking the effects of capital movements adequately into account are needed, and a new theory of economic policy including measures to protect the real economy from external volatility. Equilibrating textbook mechanisms cannot work unless trade-caused surpluses and deficits set exchange rates. To allow orthodox trade theory to work one must hinder capital flows from destroying its very basis, which the IMF and wrong regulatory decisions have done, penalising production and trade. A new, real economy based theory is proposed, a Neoclassical agenda of controlling capital flows and speculation.
Highlights
Textbook theory ignores capital flows: trade determines exchange rates and specialisation
Once upon a time the exchange rate was basically determined by the movement of goods and to a lesser degree, services, at least in textbook trade theory
As exchange rates are determined by supply and demand of currencies, it is easy to see that whatever pressure on the exchange rate might be exerted by the real economy, the effects of international trade in goods and services can be outdone by demand caused by capital movements, speculative or otherwise
Summary
Resumo: A teoria dos livros didáticos ignora os fluxos de capital: o comércio determina as taxas de câmbio e de especialização. As exchange rates are determined by supply and demand of currencies, it is easy to see that whatever pressure on the exchange rate might be exerted by the real economy, the effects of international trade in goods and services can be outdone by demand caused by capital movements, speculative or otherwise. To put it strikingly: the real sector is dominated by capital movements even if they have no or little basis in the real economy, as has increasingly become the norm This changes all the assumptions of trade theory and trade textbooks — the effects of capital flows may annihilate any productivity gains or textbook advantages.
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