In describing these trends, we have been asked several times what the nature of the market failure is. The answer seems fairly clear. There is no major market failure in the way economists normally use the term. Multinationals, businesses that operate in the global economy, and those who have a role in creating and managing global supply chains are good at what they do and getting better all the time. They are knowledgeable about doing business in multiple national environments (an important capability). They identify and respond to market and supply chain opportunities. The transactions costs of complex and geographically disperse supply chains are coming down because of a combination of management expertise and information technology that allows efficient coordination of complex, geographically dispersed systems.

The structure of the American economy is evolving. Technology is one of the driving forces, both domestically and in integrating the U.S. economy with the global economy. The domestic economy does not operate in a vacuum. In a relatively open global economy, structural change in emerging economies causes structural change in advanced countries. When a certain kind of activity declines in our economy, normally it does not just disappear from the global economy, but instead moves to another location. These powerful market forces operate directly on the tradable sector, and indirectly on the nontradable portion through wage and price effects and shifting opportunities in labor markets.

In the postcrisis environment, issues of sustainability in the trajectory of the U.S. economy have come to the fore. Among the problems pointed to are a large current account deficit, the paucity of household savings, overleveraging in the financial and household sectors, and stagnation of middleclass incomes. However, what appears missing is a detailed look at the structural shifts in the economy over longer periods, and the way in which the emerging economies’ growth is affecting the pattern of industry employment and value added in the United States. This paper attempts to close the gap, offering a fresh look at the U.S. economic structure over the past twenty years and exploring the implications of such shifts.

The open economy

So far, our model for exchange rate determination has been very simple. We have assumed that domestic interest rates are unaffected by foreign interest rates. We begin this chapter by looking more carefully at this assumption (the classical model of exchange rate determination). Then, a more realistic model of exchange rate determination is considered.

Finally, we will discuss the Mundell- Fleming model (MF-model).

The neo-classical synthesis is a synthesis of the classical model and the Keynesian model. In short, it states that the Keynesian model is correct in the short run while the classical analysis is correct in the long run. Let us consider a concrete example. According to the Keynesian model, an increase in G will increase Y and reduce unemployment. In the classical model, an increase in G will have no effect at all on Y and unemployment. In the neo-classical synthesis, an increase in G will create a temporary increase in Y but Y will return to its original value after some time.

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