From the previous post where I showed that Net exports also reflect the effective demand limit, I received some email questions. I was planning on posting an explanation, but now I will just post my quick reponses to the email questions.
The effective demand limits, i.e. the straight lines on the graph. Do you have to calculate and assume a new labor share limit to get these lines?
I did not have to calculate a new effective demand limit line for the net exports. I just had to put in a line on top of the plot and then see if net exports behaved as labor share behaved in the effective demand limit limit. And yes, the simulated limit upon net exports behaved in a similar way.
Are you saying that the export effective demand limit line has now shifted so it is basically laying on top of the yellow effective demand limit?
Yes... I am saying that the net export limit line has shifted. However, just by coinicidence it matched up with the line from the labor share plot. But you can see that the limit from labor share is holding steady as a constant line upon capacity utilization, whereas the shift in labor share caused a shift in the limit line upon net exports. That has not happenes before in the data. This represents a definite shift in labor share. We also see this shift in the monetary model, where the natural real GDP in terms of labor and capital utilization has shifted from 79% to 74% since the crisis.
How is foreign demand for our products, i.e. export demand effected by our (USA) labor share. How is that connected?
Net exports is the plot.
Think of it this way... labor share puts a limit upon domestic utilization of labor and capital, but does it put a limit on international trade, specifically net exports?
Net exports want to increase more negative if we were to shift our demand from domestic consumption to foreign consumption. However, the data shows that if we hit the "effective demand" domestic limit of utilizing labor and capital, we also hit a limit of pushing net exports more negative...
To make a long story short,,, the limit we see from effective demand on domestic production is also reflected in time upon the import/export balance.
So once we run out of demand for domestic production, we also run out of demand for foreign production. This happens for the US... However, I do not know yet whether this would happen for China for example.
