Two Shortage Model

In 60's of the 20th Century, American economists H. B. Chenery and A. M. Sturout extrapolated the Two Shortage Model theory from the identity of macro-economic. They believe that there are two shortages common existed in developing countries, namely, saving shortage and foreign exchange shortage.

Known macro-economic identity（1）：

Y=C+I+X-M--------------------------------------------（1）

where：Y-national gross income, C-total consumption, I-total investment，X and M represents the total export and import value of a country respectively. Transposing from equation （1） resulted：

Y-C-I=X-M

Therefore Y-C=S（S-total social saving）

Then S-I=X-M

Namely I-S=M-X-----------------------------------------------（2）

The left I-S of equation（2）represents the difference between investment and saving, right side M-X represents the difference between import and export. From equation （2）we see:： both sides of equation（2）should be balanced, i.e. a country’s shortage on saving should be maintained to the same of shortage on foreign exchange. In case investment larger than saving（I＞S）, a shortage on domestic saving shall appear and must be balanced by shortage on foreign exchange, i.e. import larger than export（M＞X）.

Due to the imbalance between saving shortage and foreign exchange shortage in developing countries, importing of foreign capital becomes necessary. Therefore, the success on foreign capital introduction will result in double economic effects: in one hand, the completion of suitable projects will directly increase export. Meanwhile, export will also be enhanced indirectly through scaled benefit and the cost reduction resulted from advanced technology. In another hand, proper foreign capital introduction will promote the national economic development, improve national income as well as domestic saving and government's fiscal income, and further improve the total national saving.

Although a country's two shortages can't be reimbursed by foreign capital in long-term, developing countries have to rely on their successful reformation and development on their own economic so that to finally balance the two shortage and to reduce the dependence on foreign capital. However, proper introduction on foreign capital will improve exporting capability and domestic total saving level, promote the imbalance between the two shortage back to balance naturally.

Analysis on Normal Economic Effect

Through the above analysis, we see: there is a lot of international surplus capital in one aspect, and in another aspect, there is also strong demand on international surplus capital. Plus the unification development on world economic and international finance, accelerated flowing of international capital comes to be possible. The normal economic effect resulted from international capital movement will not only bring benefit to capital importing and exporting nations, but also will boost the development of world economy, and turn the capital's international movement into a necessity.

The normal economic effect of international capital movement can be quantified through Fig.1:

　

　

　

In Fig.1, ordinate V1，V2 represents the margin productivity of two countries. In order to facilitate the analysis, rotate vertical axle V2O clockwise until these two ordinates piled up into Fig.1, then horizontal OO� represents the total capital supply of V1 and V2 , OA is the total domestic capital of V1 and O�A is the total domestic capital of V2. MPKV1 and MPKV2 represent the margin productivity of V1 and V2 respectively.

Prior to capital�s international movement, the margin revenue of capital in country V1 is OC, total production output is OFGA, among it the part of rectangle OCGA indicates the income of capital, the remaining triangle CFG indicates the income of other factors. For country V2, the margin revenue of capital is O�C, total production output is O�JMA, among it the part of rectangle O�HMA indicates the income of capital, the remaining triangle HJM indicates the income of other factors.

Under open economic condition, capital can move from country to country freely. As the capital revenue of country V1 is higher than country V2, i.e. O�H＞OC, capital in V1 will move into V2. When total among of capital AB moved from V1 to V2, the capital revenue of the two countries will reach a balancing at point E, capital revenue of country V1 equals V2, ON= O�T. At this moment, for country V1, its total production output is OFEB, among it the part of rectangle ONRA indicates the income of capital(including the income of foreign investment ABER), the income of other factors reduced to NFE. Meanwhile, for country V2, its total production output is O�JEB, ABER is the principle and interest of foreign investor, ERM is the revenue of V2 resulted from proper introduction of foreign capital. among it the part of rectangle ONRA indicates the income of capital(including the income of foreign investment ABER), the income of other factors reduced to NFE. The income of capital in country V2 reduced to O�TRA, and the income of other factors increased to TJE.

To sum up, capital�s international movement brings more reasonable capital configuration which will not only benefit the capital importing and exporting country, but also increase the total output of world economy. As shown above, the shadow part EGM in Fig.1 will be the net increasing on world economy provided that there is only V1 and V2 two countries in the world.

　

The above analysis is a static analysis with the using of reward descending law. As this analysis considers that the capital�s international movement will result in the equalization on productivity between capital importing and exporting countries, this point of view is not real. But as a quantified analysis method, it is worth to use as a reference.