international finance i
DESCRIPTION
International Finance I. What is ?. Sometimes called “open economy macro” Typical topics include trade deficit exchange rate policy--flexible, fixed, single currency (such as Euro)?. international finance. - PowerPoint PPT PresentationTRANSCRIPT
What is ?• Sometimes called “open economy macro”
• Typical topics include– trade deficit– exchange rate policy--flexible, fixed, single
currency (such as Euro)?
Haven’t we covered the trade deficit and exchange rate
determination before?• Yes (so we will do some useful review), and
• No, focus is more on international relationships between countries and on exchange rate policy (fixed versus flexible)
• Recall that international trade (comparative advantage, tariffs, etc) was covered in earlier lectures
Determinants of the overall trade deficit
• Recall spending-GDP identity Y = C + I + G + X
• Y = GDP
• C = consumption
• I = investment
• G = government purchases
• X = net exports
• Or S - I = X• X < 0 (trade deficit), if S < I as in U.S.• X > 0 (trade surplus), if S > I as in Japan
31_01
1200
1000
800
600
400
BILLIONS OFDOLLARS
NET EXPORTS (BILLIONS OF DOLLARS)(=EXPORTS - IMPORTS)
199619941984 1990 1992198819861982
0
25
50
75
100
125
150
175
Trade deficitbecause netexports are less than zero(exports are less than imports)
199619941984 1990 1992198819861982
Investment
Nationalsaving
GAP
Example of relevance for policy:U.S. international relations with Japan
• Policy problem: Japan had (has) a trade surplus and U.S. had (has) a trade deficit
• What to do about it, if anything?
• Trade restrictions are not the answer
• Must change S or I in the U.S. and Japan
• Let’s use SAM to show how it works
Long run effect of a direct investment stimulus (Japan)
22_07
2.5
5.0
7.5
0.0
R
65.062.5 67.5
C
Y
(a) Consumption Share
R
2.5
5.0
7.5
0.0
15.012.5 17.5
I
Y
(b) Investment Share
R
2.5
5.0
7.5
0.0
8075 85
NG
Y
(d)
R
2.5
5.0
7.5
0.0
0.0 2.5
X
Y
(c) Net Exports Share
-2.5
PERCENT PERCENT PERCENT PERCENT
NongovernmentShare
Long run effect of a direct savings stimulus (U.S.)
22_07
2.5
5.0
7.5
0.0
R
65.062.5 67.5
C
Y
(a) Consumption Share
R
2.5
5.0
7.5
0.0
15.012.5 17.5
I
Y
(b) Investment Share
R
2.5
5.0
7.5
0.0
8075 85
NG
Y
(d)
R
2.5
5.0
7.5
0.0
0.0 2.5
X
Y
(c) Net Exports Share
-2.5
PERCENT PERCENT PERCENT PERCENT
NongovernmentShare
Developing a U.S. policy position
• President to meet with Japanese prime minister– Options
• (1) tell PM to use policy to raise I • (2) tell PM to use policy to lower S
• President favors (1)– Decides over lunch with CEA
•Basic economic principles inform decision
The Balance of Payments ($Billions in 1996)
Merchandise trade balance -186+ Services trade balance 87= Overall trade balance (X) -99+ Net factor income from abroad -9+ Net transfers from abroad -39= Current account balance -147
31_02
Currentaccountbalance
BILLIONS OFDOLLARS
50
0
50
100
150
200
Trade balance(net exports)
1982 199619941984 1990 199219881986
Capital Account
• The the amount of funds (new debt or equity) needed to finance the current account deficit in any year
• For example, in 1996 the U.S. increased its net debtor position by $147 billion– note that the current account was $147 billion
31_03
BILLIONS OFDOLLARS
1986 19941988 19951987 199319901989 1991 1992
3,500
4,000
4,500
3,000
2,500
1,500
1,000
2,000
Foreign assets in U.S.
U.S. assets abroad
Net debtor
Net creditor
Deficits were also large at an earlier stage of U.S. history
• In the 19th century the U.S. ran large international trade deficits for many years
• The gap between S and I was large (I>>S)– Railroads across country– Leland StanfordStanford University!
• Funds were lent to the United States by Europeans
• Similar stories in Argentina and Australia
Bilateral deficits
• always a part of world trade
• preventing them by trade restrictions is harmful
• they have little to do with trade barriers
• why discussed so much?
Sector deficits
• Focus on trade within a sector or industry
• Example, U.S. runs a deficit in “baseball” caps and runs a surplus in “higher education”
• Like bilateral deficits,– micro rather than macro– do not reflect trade barriers
• Overall deficits are macro
END OF
LECTURE