Economic Model - part III - Import and Export (The crisis in Greece)

In the first part the economy we discussed three processes: Industry, banks and humans.
In the second part Economic Model part II we divided those three processes further into: Pensionfunds, Education and Health care.
In this part we will make in a sense the model smaller, on the other hand we will add import and export. Beside that we will discuss the crisis in Greece.

In this part we will subdivide the economic model in three groups:

Industry, Government and Humans

In fact we will left outside everything what has to do with money. What industry is concerned we consider here all what produces.

We will get the next picture:

                                             *
                   (4)   .............       * (7)   .............
           ------------>.             .------------>.             .
          |        (3)  .  Industry   . (8)  *      .   Humans    .      
          |   ----------.             .<------------.             .
          |  V           ............. <--.  *  .--> .............
    ...............            ^ |    (14) \ * /(11)               ............   
   .               .           | |          \ /                   .            .
   .  Government   .       (1) | | (2)       x                    . Government .
   .               .           | |          / \                   .            .
    ...............            | V     (12)/ * \ (13)              ............
          ^  |   (5)     ............. <--' (9) '--> .............
          |   --------->.             .------------>.             .
          |      (6)    .   Humans    . (10) *      .  Industry   .
           -------------.             .<------------.             .       
                         .............       *       .............
                                             *
            At home                          *               Abroad
                                           frontier

Because in this part import and export is discussed, the model is divided in two parts: Left at home en right abroad
Industry involves all production units in the privat sector.
Government involves all production units in the public sector. That means inclusif the military, education, health care, law and order and the police. The product is called services
The arrows indicate two types of flows: Labour and product flows.

• The arrows (1) and (6) indicate labour. Arrow (1) indicates labour in the industry. Arrow (6) shows labour of all the people who work in the government (in broadest sense).
• Arrow (2) indicates all the products bought in the private sector by the people and arrow (5) indicates all the services recieved by the people using the public system (health care) partly paid by the tax system.
• The arrows (3) and (4) indicate the trade between the industry and government
• Bisides those 6 there are 8 more arrows. Those are the arrows 7 untill 14. Those indicate the trade between "at home" and "abroad". The terminology "at home" should be considered very broad. This can mean a region, a country, a group of countries or almost a continent (European Community)
• The arrows (7), (9), (11) en (13), pointing out, indicate export
  
• The arrows (7) and (13) show the export of products
  Arrow (9) indicates labour performed "abroad" but that the salaries or income recieved flows back "inland"
  Arrow (11) indicates emmigration abroad.
  Arrow (13) indicates the transportation of complete production units "abroad"
• The arrows (8), (10), (12) en (14) indicate import.
• The arrow (10) and (14) indicate products produced "abroad" and which are imported.
  Arrow (8) indicates specific labour performed "at home" by foreigners and by which the income flows back "abroad".
  Arrow (12) indicates immigration of foreigners.
  Bij de pijl (14) gaat het ook over het verplaatsen van produktie eenheden van uit het buitenland naar hier.

If you study our model than we have 8 pairs arrows in relation to import and export. If each of those arrows, by pair, are equal than the system is in equilibrium.
If you consider the government than there are 2 pairs of arrows. If each of those arrows, by pair, are equal, than also that part is in equilibrium. For the government that means that the yearly incomings and outgoings are equal and that the national debt is constant. That does not mean that also the budget is in equilibrium, because a budget is only a plan.

What happens if the arrows for certain pairs are not equal? Next we will now study some examples in more detail.

• First arrow (9) which indicates labour abroad. Let us assume this arrow becomes larger which means that more countryman are going to work abroad. This is what is called: frontier labour. The result will be that more money will flow inland from abroad.

  It is important to remark that we don't discuss what "countrymen" earn and spend "abroad", beacause than you discuss in fact an increase in the number of "foreigners" and a decrease in the number of "countrymen". That means about emigration and that is arrow (11). That is not the subject here.

  The increase of this extra money is two fold:
  1. The most import result is that the request for inland procts will increase because there is more money.
  2. The demand for foreign products will also increase, which means that arrow (10) increases, however much less.
  This all seems good news. However there is also another side to the coin.
  • If abroad the situation is such that there is no increase in production than this extra influx of labour will have a negatif influence on the employment of the foreigners abroad. That means the advantage we have here will be a disadvantage over there.
  • If abroad the situation is that there is an increase in production than this influx of foreigners has no influence on the employment abroad. The most important disadvantange is than personally, at family level.
• Arrow (7) indicates the export of products abroad. If the export increases more than the import than the trade surplus with the foreign countries will increase.
  The direct result will be that more money flows inland
  What happens next depents how much the production "at home" adapts itself to this increase in demand.
  • If "at home" the people with this extra money buy products "abroad" then there is no increase in extra demand "at home" and the system will return into a state of equilibrium.
  • If the production "at home" stays the same than this increase in extra money will result that the price of the products also will increase.
  • If the production "at home" increases than there also will be an increase in the number of working people.
  This is ofcourse the ideal situation. Again the advantages on this side of the border will be an disadvantage at the other side of the border. Abroad employment will decrease.
• Arrow (13) also indicates export. In this case the move of complete production units. An example is for example if Germany sells machines to China. This can be both an advantage for Germany as for China. In Germany there is an immediate increase in labour productivity. In the case of China this are long term investments and increase in productivity using state of the art technology will be delayed.
• Arrow (10) indicates the buying of products abroad. An important reason can be that these products are much better. Also in this case there are a couple of possibilities.
  • If the people have no money to buy products than they have to borrow money.
  • If the government has no money than also the government has to borrow money and we will get a national debt.
  • Still worse it will be if a decrease in buying-power has influence on the industry in general. This will be discussed in the nexet paragraph.
• Arrow (13) stands for the export of products, but also for complete production units. For example the transfer of a complete factory to a low salary country
  The result will be a decrease in production "at home" a decrease in buying-power and unemployment.
  The advantages are wholly "abroad".
  An example of a decrease in production capacity is Greece. On example is the shipsbuilding industry. To make things worse Greece imports too much. The general solution is more production. The greece should build more cars themselves, build roads, build houses, etc. In general this is difficult.
  A different solution is that the greece start working "abroad" and sent their income back.
• Arrow (11) describes emigration. Arrow (12) describes immigration.
  If two countries are in equilibrium than an inflow of people always has a disadvantage for the receiving country in general, because the inflow has a negatif influence on the employment assuming constant production level.
  The outflow of people has a positif influence on employment in the country of origin
  In the years 1950 this was different in respect of emmigration possibilities from the Netherlands to Canada and Autralia because there was a high demand for certain occupations. The production capacities abroad where not fixed. In such a case there were winst possibilities for the country of origin and abroad.

Personal thoughts

Feedback

Back to my start page: Index of this document