DO INFLOWS OF FOREIGN CAPITAL HARM THE ECONOMY?
Some observers are concerned that current-account deficits might have significant detrimental effects on the economy. In fact, the decline in saving that brought on the continuing deficits has a number of negative economic effects, but in general, the deficits themselves do not further harm the economy as a whole. Rather, the inflows of capital from abroad benefit it by offsetting some of the negative effects of the decline in saving. Effects on GDP, GNP, and Wages The inflows of foreign investment accompanying the current-account deficit have had small positive effects on GDP and wages. Both are higher than they would have been if government policy had been used to prevent the deficit from arising in response to the decline in saving. The effect of the current-account deficit on gross national product (GNP) is even smaller, but whether the effect is positive or negative is unclear.(7) GDP increases because most of the net inflow of foreign investment over time eventually translates in
