Popular Myths about the World EconomyPopular Myths about the World Economy

July 31, 1997

Many of us "know" things that are not true, and we sometimes act, or urge our representatives to act, on our mistaken beliefs. This article examines three common myths, or misconceptions, about the international economy. The author points out that, as with most myths, these embody grains of truth, but if accepted without qualification they could lead to grievous policy errors.

The author analyzes three common false assumptions: that global competition prevents inflation; that fair trade requires equal labor standards; and that small firms cannot profitably export. Global competition is a weak reed on which to rely for control of the overall price level, he finds. Far more important are U.S. monetary and exchange-rate policies, whose potency has been demonstrated many times over. He also argues that the failure to enforce certain core labor standards, such as a standard prohibiting forced labor, probably lowers a country's productivity rather than affording it an unfair competitive advantage. And the data on exporting show that relatively small as well as large firms can thrive while exporting.

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