Chapter Eight

Global Imbalances


Source: John Coe

THE LAST THREE CHAPTERS focused on economists' standard trilogy of market failures: small numbers, externalities, and informational problems. This chapter deals with a different kind of phenomenon—one subject to a spirited debate about whether leave-it-to-the-market policies really are prone to create problems (as they do in the presence of the standard sorts of market failures) or not.

The phenomenon concerns cross-border imbalances. These are illustrated by the cartoon, which depicts the imbalance that has resulted from the chronic U.S. trade deficit and accumulation of debt obligations vis-à-vis ...

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