Appendix 5.1: Deriving the AD Curve

		Curiosity 6.2: What about Foreign Financing?

		Domestic financing for private investment comes from national saving, which is private saving less the government deficit. Foreigners may also provide financing, which can be examined by including imports (M) and exports among the aggregate demand categories that comprise GDP.

		GDP can be written as C + I + G + x - M, reflecting its aggregate demand makeup, or C+ T + S, reflecting its breakdown for financing purposes. Equating these two expressions, we get

		C + I + G + x - M = C + T + S

		Cancel the Cs and move the x - M to the financing side to get

		I + G = T + S + M - X

		This equation shows that financing for G and I comes from taxes, private saving, and foreign source M - X, as illustrated in figure 6.3.

		Figure 6.3 The Role of International Financing

		By buying government or private bonds, foreigners can augment national saving, thereby helping finance a higher level of private investment.

		How does M - x represent foreign financing? M - x is the excess of U.S. imports over exports. In 1994 this was about $150 billion, representing US$150 billion left in the hands of foreigners after they paid for their imports. These dollars are available to be loaned to U.S. citizens, augmenting the sources of financing discussed earlier. More on this topic appears in chapter 15 discussing the balance of payments, where this foreign financing is referred to as capital inflows. In formal terms we have

		Private investment = National saving + Foreign financing

		A final comment on the role of the foreign sector in growth is in order, to dispel an unfortunate myth that has misled debate on this issue. Growth in a country's standard of living is not affected by how ''competitive" it is relative to other countries; as emphasized earlier, the key is domestic productivity growth. If two countries both improve their productivity by the same amount, they both improve their standards of living and their competitiveness is unaffected. Another country can increase its productivity by more than we increase our productivity, and so it will become more "competitive" relative to us, but our standard of living nonetheless increases according to our own increased productivity. Calls for increasing our international competitiveness are out of place; what is important is to increase our productivity regardless of what other countries are doing.