CHAPTER 10

EXCHANGE RATES
& THE
INTERNATIONAL FINANCIAL SYSTEM

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A. THE BALANCE OF INTERNATIONAL
PAYMENTS
▪ In the area of international economics, the key accounts
are a nation’s balance of payments. A country’s balance
of international payments is a systematic statement of all
economic transactions between the country and the rest
of the world. Its major components are the current
account and the financial account
▪ The basis elements of the balance of payments has two
fundamental parts. The current account which
represents the spending & receipts on goods & services
along with the transfers. The financial account includes
purchases & sales of financial assets & liabilities. An
important principle is that the two must always sum to
zero:
Current account + financial account – I + II = 0
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 DEBITS & CREDITS
▪ Like other accounts, the balance of payments
records each transaction as either a plus or a
minus. The general rule in the balance-of-
payments accounting is the following:
▪ If a transaction earns a foreign currency for the
nation, it is called a credit & is recorded as a plus
item. If a transaction involves spending foreign
currency, it is a debit & is recorded as a negative
item. In general, exports are credits & imports are
debits
▪ Exports earn foreign currency, so they are credits.
Imports require spending foreign currency, so
they are debits
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DETAILS OF THE BALANCE OF PAYMENTS
▪ Balance of current account (merchandise,
services, investment income, & unilateral
transfers). This includes all items of income &
outlay – imports & exports of goods & services,
investment income, & transfer payments. The
current-account balance is akin (similar) to the net
income of the nation. It s conceptually similar to
net exports in the national output accounts
▪ Financial account (private, government - official
reserve changes & others) transactions are asset
transactions between Americans & foreigners.
They occur, for example, when Japanese pension
fund buys U.S. government securities or when
American buys stock in German firm
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 B. THE DETERMINATION OF FOREIGN
EXCHANGE RATES
▪ Foreign trade involves the use of different national
currencies. The foreign exchange rate is the price
of the currency in terms of another currency. The
foreign exchange rate is determined in the
foreign exchange market, which is the market
where different currencies are trade
▪ A fall in the price of one currency in terms of one
or all others is called depreciation
▪ A rise in the price of a currency in terms of
another currency is called an appreciation

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EFFECTS OF CHANGES IN TRADE

▪ What would happen if there were changes in

demand?
▪ For example, if Japan has a recession, its
demand for imports declines. As a result, the
demand for American dollars would
decrease. The decline in purchases of
American goods, services, & investment
decreases the demand for dollars in the
market

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 EXCHANGE RATES & THE BALANCE OF PAYMENTS
▪ What is the connection between exchange rates &
adjustments in the balance of payments?
▪ In the simplest case, assume that exchange rates are
determined by private supply & demand with no private
intervention.
▪ Consider what happened in 1990 after German
unification (union) when the German central bank
decided to raise interest rates to curb (control) inflation.
After the monetary tightening, foreigners moved some of
their assets into German marks to benefit from high
German interest rates. This produced ad excess demand
for the German mark at the old exchange rate. In other
words, at the old foreign exchange rate, people were, on
balance, buying German marks & selling other
currencies
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Exchange rate plays its role as equilibrator.
▪ As the demand for German marks increased, it led to
an appreciation of the German mark & a
depreciation of other currencies, such as the U.S.
dollar. This movement in the exchange rate
continued until the financial & current accounts were
back in balance. The equilibration for the current
account is easiest to understand. Here, the
appreciation of the mark made German goods more
expensive & led to a decline in German exports & an
increase in German imports. Both of these factors
tended to reduce the German current-account
surplus
▪ Exchange rate movements serve as a balance wheel
to remove disequilibria (imbalance) in the balance
of payments
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PURCHASING-POWER PARITY & EXCHANGE RATES
▪ In the short run, market-determined exchange rates
are highly unstable in response to monetary policy,
political events, & changes in expectations. But over
the long run, exchange rates are determined primarily
by the relative prices of goods in different countries.
▪ An important implication is the purchasing-power
parity (equality) theory of exchange rates. Under this
theory, a nation’s exchange rate will tend to equalize
the cost of buying traded goods at home with the cost
of buying those goods abroad. Example, $1000 of
goods in the Unites States will cost 10,000 pesos in
Mexico. Increase in prices of Mexican goods will
increase demand for Mexican pesos

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 C. INTERNATIONAL MONETARY SYSTEM
▪ International monetary system denotes the institutions
under which payments are made for transactions that
cross national boundaries. In particular, the monetary
system determines how foreign exchange rates are set
& how governments can affect exchange rates
▪ A well functioning monetary system will facilitate
international trade & investment & smooth adaptation
to change. A monetary system that functions poorly
may not only discourage the development of trade &
investment among nations but subject their economies
to disruptive (disturbing) shocks when necessary
adjustments to change are prevented or delayed
▪ The central element of the international monetary
system involves the arrangements by which exchange
rates are set
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 3 MAJOR EXCHANGE-RATE SYSTEMS
▪ 1. A system of fixed exchange rates.
Governments specify the exact rate at which
dollars will be converted into pesos, yen, & other
currencies. Historically, the most important fixed-
exchange rate was the gold standard, which was
used off & on from 1717 until 1933. In this system,
each country defined the value of its currency in
terms of a fixed amount of gold, thereby
establishing fixed exchange rates among the
countries on the gold standard. By definition there
would be no foreign-exchange-rate problem.
Gold would be the common world currency
▪ Exchange rates (also called “par values” or
“parities”) for different currencies were
determined by the gold content of their monetary
units

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▪ 2. A system of flexible or floating exchange rates,
where exchange rates are determined by market
forces
▪ 3. Managed exchange rates, in which nations
intervene to smooth exchange-rate fluctuations or to
move their currency toward a target zone
▪ Understanding the gold standard is important not
only because of its historical role but also because it
is a pure example of a fixed-exchange rate system. If
the country is not free to move when the prices or
incomes among countries get out of line, domestic
prices & incomes must adjust to restore equilibrium.
Now that Europe has adopted a common currency,
any imbalance in output or employment among the
European nations must be made through changes in
domestic price levels rather than changes in
exchange rates
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▪ In modern microeconomic thinking, prices & wages
adjust through movements in output & employment
▪ When a country adopts a fixed exchange rate, it
faces an inescapable fact: Real output &
employment must adjust to ensure that its relative
prices are aligned with those of its trading partners
▪ The major international economic institutions of the
postwar period were the General Agreement on
Tariffs & Trade (rechartered as the World Trade
Organization in 1995), Bretton Woods exchange-
rate system, the International Monetary Fund,
& the World Bank. These four institutions helped
the industrial democracies rebuild themselves &
grow rapidly after the devastation of World War II, &
they continue to be the major international
institutions today

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 THE INTERNATIONAL MONETARY FUND
▪ An integral part of the Bretton Woods system was
the establishment of the International Monetary
Fund (or IMF), which still administers the
international monetary fund & operates as a
central bank for central banks.
▪ Member nations subscribe by lending their
currencies to the IMF; the IMF the relends these
funds to help countries in balance-of-payments
difficulties.
▪ The main function of the IMF is to make temporary
loans to countries which have balance-of-
payments problems or are under speculative
attack in financial markets
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THE WORLD BANK

▪ Another international financial institution

created after World War II was the World
Bank. The Bank is capitalized by high-income
nations that subscribe in proportion to their
economic importance in terms of GDP &
other factors. The Bank makes long-term low-
interest loans to countries for projects
private-sector financing. As a result of such
long-term loans, goods & services flow from
advanced nations to developing countries
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 THE BRETTON WOODS SYSTEM
▪ Economists of the 1930s & 1940s, particularly John
Maynard Keynes, were greatly influenced by the
economic crisis of the prewar period. They were
determined to avoid the economic chaos &
competitive devaluations that had occurred during
the Great Depression. They believed that the gold
standard was too inflexible & served to deepen &
lengthen business cycles
▪ To replace the gold standard, the Bretton Woods
system established a parity for each currency in
terms of both the U.S. dollar & gold. The
revolutionary innovation of the Bretton Woods
system was the exchange rates were fixed but
adjustable. When one currency got too far out of
line with its appropriate or “fundamental” value, the
parity could be adjusted
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 INTERVENTION
▪ When a government fixes its exchange rate,
it must “intervene” in foreign exchange
markets to maintain the rate. Government
exchange-rate intervention occurs when the
government buys or sells foreign exchange
to effect exchange rates. For example, the
Japanese government on a given day might
buy $1 billion worth of Japanese yen with
U.S. dollars. This would cause a rise in value,
or an appropriation, of the yen

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▪ Suppose the demand for pesos falls – perhaps
because inflation in Argentina is higher that in
the United States or because Brazil, an
important trading partner, has a recession or a
depreciation. This produces a downfall shift in
the demand for pesos. In a world of flexible
exchange rates, the peso would depreciate &
and reach a new equilibrium. Recall that
Argentina is committed to maintaining the
parity of $1 per peso.What can it do?

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▪ One approach is to intervene by buying the depreciating
currency (pesos) & selling the appreciating currency
(dollars). In this example, if Argentina’s central bank buys
the pesos, this will increase the demand for pesos &
maintain the official parity
▪ An alternative would be to use monetary policy. Argentina
could induce the private sector to increase the demand for
pesos by raising interest rates. Say that Argentinian interest
rates rise relative U.S. rates; this would lead investors to
move funds into pesos & increase the private demand for
pesos
▪ These two operations are not really as different as they
sound. In effect, both involve monetary policies in
Argentina. In fact, one of the complications of managing the
open economy, as we will see shortly, is that the need to use
monetary policies to manage the exchange rate can collide
with the need to use monetary policy to stabilize the
domestic business cycle

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 FLEXIBLE EXCHANGE RATES
▪ Fixed exchange rates are one of the cornerstone
(foundation) of today’s international monetary system
– the other important system is flexible exchange
rates. A country has flexible exchange rates when
exchange rates move purely under the influence of
supply & demand. Another term often used is floating
exchange rates, which means the same thing
▪ Today, flexible exchange rates are used by the three
major economic regions – the United States, the
countries of Euroland, & Japan. For these three
regions, the movements of exchange rates are
determined almost entirely the private supply &
demand of goods, services, & investments
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 MANAGED EXCHANGE RATES
▪ In between the two extremes of rigidly fixed &
completely flexible in the middle ground of
managed exchange rates. Here, exchange rates
are basically determined by market forces but
governments buy or sell currencies or change
their money supplies to affect their exchange
rates. Sometimes governments lean against the
winds of private markets. At other times
governments have “target zones” which guide
their policy actions. This system is becoming
less important as countries are increasingly
gravitating toward fixed-or flexible-exchange-
rate systems

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 TODAY’S HYBRID SYSTEM
▪ Unlike the earlier uniform system under either
the gold standard or Bretton Woods, today’s
exchange-rate system fits into no tiny mold.
Without anyone’s having planed it, the world has
moved to a hybrid exchange-rate system. The
major features are as follows:
▪ A few countries allow their currencies to float
freely. In this approach, a country allows markets
to determine its currency’s value & it rarely
intervenes. The United States has to fit this patter
for most of the last two decades. While the Euro
is just a infant as a common currency, Europe
appears to be leaning toward the freely floating
group
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▪ Some major countries have managed but flexible
exchange rates. Today, this group includes
Canada, Japan, & many developing countries.
Under this system, a country will buy or sell its
currency to reduce the day-to-day volatility
(unstable) of currency fluctuations. In addition, a
country will sometimes engage in systematic
intervention to move its currency toward what it
believes to be a more appropriate level

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▪ Many countries, particularly small ones, peg
(fasten) its currencies to a major currency or to
a “basket” of currencies in a fixed exchange
rate. Sometimes, the peg is allowed to glide
smoothly upward or downward in a system
know as gliding or crawling peg. A few
countries have the hard fix of a currency board
▪ In addition, almost all countries tend to
intervene either when markets become
“disorderly” or when exchange rates seem far
out of line with the “fundamentals” – that is,
when they are inappropriate for existing price
levels & trade flows

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 SUMMARY
▪A freely flexible exchange rate is one
determined purely by supply & demand without
any government intervention
▪ A fixed-exchange-rate system is one where
governments state official exchange rates, which
they defend through intervention & monetary
supplies
▪ A managed-exchange-rate system is a hybrid
of fixed & flexible rates in which governments
attempt to affect their exchange rates directly by
buying or selling foreign currencies or indirectly
, through monetary policy, by raising or lowering
interest rates

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 CHAPTER 11
OPEN-ECONOMY
MACROECONOMICS

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A. FOREIGN TRADE & ECONOMIC ACTIVITY

▪ Open-economy macroeconomics is the study

of how economies behave when the trade &
financial linkages among nations are
considered. Foreign trade involves imports 7
exports
▪ Imports are goods & services produced
abroad & consumed domestically
▪ Exports are goods & services produced
domestically & purchased by foreigners
▪ Net exports are defined as exports of goods &
services minus imports of goods & services
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 DETERMINANTS OF TRADE & NET EXPORTS
▪ The demand for imports depends upon the relative price
of foreign & domestic goods. If the price of domestic cars
rises relative to the price of Japanese cars, say, because
the dollar’s exchange rate appreciates, Americans will buy
more of Japanese cars & fewer American ones. Hence the
volume & value of imports will be affected by domestic
output & the relative prices of domestic & foreign goods
▪ Exports are the mirror image of imports: U.S. exports are
other countries’ imports. American exports therefore
depend primarily upon foreign output as well as upon the
prices of U.S. exports relative foreign goods. As foreign
output rises, or as the exchange rate of the dollar
depreciates, the volume & value of American exports tend
to grow

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SHORT-RUN IMPACT OF TRADE TO GDP
▪ How do changes in a nation’s trade flows affect its GDP &
employment? We first analyze this question in the
context of our short-run model of output determination,
the multiplier model of chapter 25. The multiplier model
shows how, in the short run when there are unemployed
resources, changes in trade will affect aggregate
demand, output, & employment
▪ There are two major new macroeconomic elements in
the presence of international trade
▪ First, we have fourth component of spending, net
exports, which to aggregate demand
▪ Second, an open economy has different multipliers for
private investment & government domestic spending
because some spending leaks out to the rest of the
world
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 THE MARGINAL PROPENSITY (TENDENCY) TO
IMPORT & THE SPENDING LINE
▪ The marginal propensity to import, which we
will denote MPM, is the increase in the dollar
value of imports for each $1 increase in GDP
▪ Marginal propensity to import is closely
related to the marginal propensity to save
(MPS). Recall that the MPS tells us what
fraction of an additional dollar of income is
not spent but leaks into saving. The marginal
propensity to imports tells how much of
additional output & income leaks into imports

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THE OPEN-ECONOMY MULTIPLIER
▪ Surprisingly, opening up an economy lowers
the multiplier
▪ One way of understanding the expenditure
multiplier in an open economy is to calculate
the rounds of spending & respending
generated by an additional dollar of
government spending, investment, or
exports
▪ Open-economy multiplier = 1 / MPS + MPm

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MACROECONOMIC POLICY & THE EXCHANGE-
RATE SYSTEM
▪ When financial investments can flow easily among
countries & the regulatory barriers to financial
investments are low, we say that these countries have
high mobility of financial capital
▪ Fixed exchange rate – the key feature of countries with
fixed exchange rates & high capital mobility is their
interest rates must be very closely aligned
▪ Consider a small country that pegs (fastens) its
exchange rate to a larger country. Because the small
country’s interest rates are determined by the
monetary policy of the large country, the small country
no longer has an independent monetary policy. The
small country’s monetary policy must be devoted to
ensuring that its interest rates are aligned with its
partner’s
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▪ Flexible exchange rates. One important insight in this
area is that macroeconomic policy with flexible
exchange rates operates in quite a different way from
the fixed-exchange-rate case. Monetary policy
becomes highly effective with a flexible exchange rate
▪ One of the examples of the operation of
macroeconomic policy with flexible exchange rates
occurred when Federal Reserve tightened money in the
1979-1982 period. The monetary tightening raised U.S.
interest rates, which attracted funds from abroad into
dollar securities. This increase in demand for dollars
drove up the foreign exchange rate. At this point, the
multiplier mechanism swung into action. The high
dollar exchange rate reduced net exports & contributed
to the deep U.S. recession of 1981-1983 in the way we
described earlier. The net effect was a reduction in real
GDP

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▪ Foreign trade produces a new & powerful link in
the monetary transmission mechanism when a
country has flexible exchange rates. When
monetary policy exchange interest rates, this
affects exchange rates & net exports as well as
domestic investment. Monetary tightening leads
to exchange rate appreciation & a decline in net
exports (and monetary easing does the
opposite). The interest-rate impact on net
exports reinforces the impact on domestic
investment: tight money lowers output & prices

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 TRADE & ECONOMIC ACTIVITY, 1980 - 2003
▪ In a world where nations are increasingly linked by trade
& finance, foreign trade can have a major impact on
domestic output & employment
▪ As the dollar rose, American export prices increased &
the prices of goods imported into the United States fell
▪ Trade flows respond to exchange-rate changes, but with a
time lag (delay). The real appreciation of the dollar
during the early 1980s increased U.S. export prices &
reduced prices of goods imported into the United States.
As a result, the trade deficit rose sharply. When the dollar
depreciated after 1985, the trade deficit began to shrink.
The recent increase in the current account deficit has
resulted from dollar appreciation & slow growth outside
the United States
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B. INTERDEPENDENCE IN THE GLOBAL ECONOMY
▪ Economic growth in the open economy. The first section
described the short-run impact of international trade &
policy changes in the open economy. These issues are
crucial for open economies combating unemployment &
inflation. But countries must also keep their eye on the
implications of their policies for long-run economic
growth. Particularly for small countries, the concerns
about economic- growth is paramount (dominant).
▪ But economic growth involves more than just capital. It
requires moving toward the technological frontier by
adopting the best technological practices. It requires
developing institutions that nurture investment & the
spirit of experience. Other issues – trade policies,
intellectual property rights, policies toward direct
investment, & the overall macroeconomic climate – are
essential ingredients in the growth of open economies

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 SAVING & INVESTMENT IN THE OPEN ECONOMY
▪ In a closed economy, total investment equals
domestic saving. For open economies, world
financial markets are another source of
investment funds & another outlet for domestic
saving. Countries that are hungry for funds
because of profitable domestic investment
opportunities can go to world financial
markets to finance their investments.
Traditionally, middle-income countries in Latin
America or Asia have borrowed from abroad
to finance domestic capital

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DETERMINATION OF SAVING & INVESTMENT
AT FULL EMPLOYMENT
▪ It is useful to consider how saving & investment are
allocated I the long run in a “classical” economy with full
employment & flexible prices. We consider the simplest
case where there is or inflation or uncertainty. We begin
with a closed economy & then extend the analysis to an
open economy
▪ In a closed economy, we know that investment must
equal private saving plus the government surplus. We
simplify by assuming that taxes, government spending, &
private saving are independent of interest rates. Hence,
total domestic saving (public & private) is a given
amount at full employment
▪ Investment is sensitive to the interest rate. Higher
interest rates reduce spending on housing & business
plant & equipment

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▪ Open-economy saving. An open economy has
alternative sources of investment & alternative
outlets for saving. A small open economy must
equate its domestic interest rate with the world real
interest rate, rw. It is small to affect the world
interest rate, & because capital mobility is high,
financial capital will move to equilibrate interest
rates at home & abroad
▪ Net exports are determined by the balance
between national saving & investment as
determined by domestic factors plus the world
interest rate
▪ Changes in exchange rates are the mechanism by
which saving & investment adjust. That is, exchange
rates move to ensure that the level of net exports
balances the difference between domestic saving &
investment
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EXAMPLES OF THE OPEN-ECONOMY SAVING-
INVESTMENT THEORY
▪ An increase in private saving or lower government
spending in a country will increase national saving. This
will lead to depreciation of the exchange rate until net
exports have increased enough to balance the increase
in domestic saving
▪ An increase in domestic investment, say, because of an
improved business climate or a burst of innovations. This
will lead to an appreciation of the exchange rate until
net exports decline enough to balance saving &
investment. In this case, domestic investment crowds out
foreign investment
▪ An increase in world interest rates will reduce the level
of investment. This will lead to an increase in the
difference between saving & investment, to a
depreciation in the foreign exchange rate, & to an
increase in net exports & foreign investment.
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 PROMOTING GROWTH IN THE OPEN ECONOMY
▪ The single most important way of increasing per capita
output & living standards is to ensure that the country
adopts best-practice techniques in its production
processes. It does little good to have a high investment
rate if the investments are in the wrong technology.
Reaching the technological frontier will involve
engaging in joint ventures with foreign firms, which in
turn requires that the institutional framework be
hospitable to foreign capital
▪ Another important set of policies is trade policies.
Evidence suggests that an open trading system
promotes competitiveness & adoption of best-practice
technologies. By keeping tariffs & other barriers to trade
low, countries can ensure that domestic firms feel spur of
competition & that foreign firms are permitted to enter
domestic markets when domestic producers sell at
inefficiently high prices or monopolize particular
sectors
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▪ When countries consider their saving & investment,
they must not concentrate entirely on physical
capital. Intangible capital is just as important.
Studies show that countries that invest in human
capital through education tend to perform well &
be resilient (elastic) in the face of shocks. May
countries have valuable shocks of natural resources
– forests, minerals, oil & gas, fisheries, & arable land
– that must be managed carefully to ensure that
they provide the highest yield for the country
▪ One of the most complex factors in a country’s
growth involves immigration & emigration.
Historically, the United States has attracted large
flows of immigrants that not only have increased
the size of its labor forces but also have enhanced
the quality of its culture & scientific research.

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▪ One of the most important & subtle influences concerns the
institutions of the market. The most successful open
economies – like the Netherlands & Luxembourg in Europe
or Taiwan & Hong Kong in Asia – have provided a secure
environment for investment & entrepreneurship.
▪ This involved establishing a secure set of property rights,
guided by the rule of law.
▪ Increasingly important is the development of intellectual
property rights so that inventors & creative artists are
assured that they will be able to profit from their activities.
Countries must fight corruption, which is a kind of private
taxation system that preys on the most profitable
enterprises, creates uncertainty about property rights,
raise costs, & has a chilling effect on investment

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▪ A stable macroeconomic climate means that taxes
are reasonable & predictable & that inflation is low, so
lenders need not worry about inflation confiscating
their investments. Countries that provide a favorable
institutional structure attract large flows of foreign
financial capital, while countries that have unstable
institutions, like Russia or Sudan, attract relatively little
foreign funds & suffer “capital flight”, in which local
residents move their funds abroad to avoid taxes,
expropriation (confiscation), or loss of value
▪ Promoting economic growth in an open economy
involves ensuring that business is attractive for
foreign & domestic investors who have a wide array
(range) of investment opportunities in the world
economy

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C. INTERNATIONAL ECONOMIC ISSUES AT
CENTURY’S START
▪ In this final section, we apply the tools of
international economics to examine two of the
central issues that have concerned nations in
recent years.
▪ In the first part, we examine the issue of the
difference between competitiveness &
productivity. In the final part, we will turn to one
of the durable issues of the global economy –
the choice between fixed & flexible exchange
rates

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COMPETITIVENESS & PRODUCTIVITY
▪ “The deindustrialization of America
The overvalued dollar in the 1980s produced severe
economic hardships in many U.S. sectors exposed to
international trade. Industries like automobiles, steel,
textiles, & agriculture found the demand for their
products shrinking as exchange rate appreciation led to
a rise in their prices relative to the prices of foreign
competitors. Unemployment in America’s manufacturing
heartland increased sharply, factories were closed, &
the midwest became known as the “rust belt’

Economists saw a different syndrome at work – the

classic disease of an overvalued exchange rate. To
understand the fundamentals, we must distinguish a
nation’s competitiveness from its productivity

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▪ Competitiveness refers to the extent to which a nation’s
goods can compete in the marketplace; this depends
primarily upon the relative prices of domestic & foreign
products. Competitiveness must be distinguished from
productivity, which is measured by the output per unit
of input. Productivity is fundamental to the growth in
living standards in a nation: to a first approximation, a
nation’s real income grows in step with its productivity
growth
▪ Fundamental source of competitiveness: As the
theory of comparative advantage demonstrates, nations
are not inherently uncompetitive. Rather, they become
uncompetitive when their prices move out of line with
those of their trading partners

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 TRENDS IN PRODUCTIVITY
▪ Competitiveness is important for trade but has no intrinsic
(natural) relationship to the level of growth of real incomes. China
enjoyed a massive trade surplus in the 1990s at the same time that
the United States ran a large deficit. But surely that does not mean
that Americans would trade their living standards for those in
China. Loss of competitiveness in international markets results
from a nation’s prices being out of line from those of its trading
partners; it has no necessary connection with how a nation’s
productivity compares with other countries’ productivity
▪ A particularly revealing study by the Mckinsey Global Institute
found that in 1990 manufacturing productivity in Japan was 17%
below that in the United States while German productivity was
21% below U.S. levels. Furthermore, the United States maintained
a productivity lead in four of the manufacturing industries
studied: computers, soaps & detergents, beer, & food. Japanese
workers had higher productivity than U.S. workers in automobiles,
auto parts, metalworking, steel, & consumer electronic production.
In none of the industries surveyed were German workers the most
productive, & indeed German productivity had declined relative
to that in the United States during the 1980s
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