Does the Third World growth hurt the First World prosperity? By Paul Krugman

Does the Third World growth hurt the First World prosperity? By Paul Krugman

Name: Camila Aliaga G.

Introduction

The article that it has been written by Paul Krugman implies a big dilemma if the development of Third World nations is good or not. As in the last years we have seen how the countries of the Third World have been growing in a big magnitude, it is analyze how this countries’ growth can affect the prosperity of the First World countries.

The improvement on the living standards of the Third World it is because of the big amounts that they receive of their export, this cause that some of the countries went out of poverty. This is an important reason for the First World to be concerned because companies would prefer to hire skilled people of the developing countries with lower wages, than unskilled people pf the developed countries with high wages; people of the First world started to lose their jobs and to suffer a decrease in their wages.

However, all these fears should be faded because as Third World countries converge on First World productivity, world productivity rises and as a result, average world living standards must rise; As Third World productivity rises, an increase in Third World wages will be reflected and not a decrease in First World incomes. Moreover, the purchasing power of people, consumers and producers, will be higher.

Model 1: A One-Good, One-Input World

This model is a simple one, it consist in a world where there is no global economy issues, countries produces one good (chips) and labor is the only input to produce this.

The wage rate of every country is in terms of chips, so if you produces more chips you will have more money per year, this is relate with the productivity of every country

If a country increase their productivity in the production of chips, their wage rate will increase too, but this growth will not affect the other countries because all of them produce just chips.

As the author said, this is a very oversimplified model because there is no international trade, all countries produces the same good, it does not take in count the capital and without It there is no international investment. Other problem is that in the real world wages do not raises when productivity does, it is something not realistic.

However, this model, as simple as it looks, shows us that if the Third World productivity raises it will affect the world output, and if the world output increase there is going to be money in someone’s pocket.

Model 2: Many Goods, One-Input

The author says that because of the limited range of goods, trade is the cause and effect of specialization. Trade between Third and First World is an exchange of sophisticated high-tech goods and labor intensive goods.

It mentions that if a country grows in productivity it can affect the rest of the world in real incomes, the impact of the productivity growth it can be either positive or negative for the domestic welfare, and this depends in the bias productivity growth.

Also presents the Lewi’s model that illustrate how the effect of the productivity growth of developing countries on the real wages in advanced nations can work either way.

This model consist that there is 2 regions in the world, North and South, both regions produces 3 goods, high-tech, medium-tech and low-tech, and labor is the only input like in the model before.

North is more productive in all goods that South, but it is even more productive in high-tech goods, for instance, North is going to specialize in high-tech goods, and South in low-tech goods and both regions will produce at least a few quantity of medium-tech goods.

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