omething happened to cause its foreign investments to fail, Econoland could face financial collapse. In the meantime, the account deficit is likely to continue rising, causing an even more inflationary situation where EconolandÆs diminishing savings are compensated for with increasing finance from abroad. To stave off the bursting of the economic bubble, Econoland could try to save more at home and invest abroad less, but it may find that difficult to do without compromising its interest rate gains. It might consider higher-risk investments, but that could be equally as dangerous as the big account deficit. Econoland may in the end find that it has no other option than to begin preparing for the inevitable bursting of the bubble and planning how to recoup its losses when that occurs.
3. Most of the worldÆs international trade takes place between similar developed economies due to ôincreasing returns to scale technology of productionö (ôAnalysis of International Trade in the Presence of Increasing Returns to Scale technologyö). In increasing returns to scale production, if all inputs are doubled, the output is more than doubledùpossibly even quadrupled; if inputs are halved, less than half the output is produced, maybe only one-fourth (ôAnalysis of International Trade in the Presence of Increasing Returns to Scale technologyö). Essentially, there is ôa disproportionately large effect on outputö when international trade takes place between similar developed economies; the more capital and labor are pumped into this type of trade venture, the more the output is multiplied (ôAnalysis of International Trade in the Presence of Increasing Returns to Scale technologyö). This superabundant output does not take place when one of the countries is less developed than the other, which is why countries of similar development status tend to engage in trade with each other rather than opting to engage in trade with those that ...