Lectures in Macroeconomics- Charles W. Upton

Investment and the Trade Balance

Investment and the Trade Balance

Net Foreign Investment and the Trade Deficit (As % of GDP),

1980-2000

Investment and the Trade Balance

Net Foreign Investment and the Trade Deficit (As % of GDP),

1980-2000

Which is the Chicken and Which is the

Egg?

Investment and the Trade Balance

Net Foreign Investment and the Trade Deficit (As % of GDP),

1980-2000

Which is the Chicken and Which is the

Egg?

Previous explanations talk about the investment as a way of covering our spending. Maybe it is the

other way around

Investment and the Trade Balance

(d) Investment OpportunitiesD= I – S + (G-T)+X-M

0

SThis is the

place to invest because the economy is

good.

Investment and the Trade Balance

(d) Investment OpportunitiesD= I – S + (G-T) +X-M

0

SThis is the

place to invest because the economy is

good.

Many economists place their bets on this explanation.

Investment and the Trade Balance

An Analogy

• You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it.

Investment and the Trade Balance

An Analogy

• You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it.

• Huge investments in hotels, roads, and infrastructure are required.

Investment and the Trade Balance

An Analogy

• You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it.

• Huge investments in hotels, roads, and infrastructure are required.

• A huge negative balance on capital account.

Investment and the Trade Balance

An Analogy

• You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it.

• Huge investments in hotels, roads, and infrastructure are required.

• A huge negative balance on capital account.

• Is this bad? Obviously not.

Investment and the Trade Balance

Evidence

• Does the trade balance track saving?

Investment and the Trade Balance

Evidence

• Does the trade balance track saving? No

Investment and the Trade Balance

Evidence

• Does the trade balance track saving? No

• Does the trade balance track government deficits?

Investment and the Trade Balance

Evidence

• Does the trade balance track saving? No

• Does the trade balance track government deficits? No

Investment and the Trade Balance

Evidence

• Does the trade balance track saving? No

• Does the trade balance track government deficits? No

• Does the trade balance track investment opportunities?

Investment and the Trade Balance

Evidence

• Does the trade balance track saving? No

• Does the trade balance track government deficits? No

• Does the trade balance track investment opportunities? Yes

Investment and the Trade Balance

Trade and Investment

• 19th Century Trade Balances

• Post World War II

• The Business Cycle

• International Comparisons

Investment and the Trade Balance

19th Century Trade Balances

• In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British.

Investment and the Trade Balance

19th Century Trade Balances

• In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British.

• There were significant investment opportunities in this rapidly growing economy.

Investment and the Trade Balance

19th Century Trade Balances

• In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British.

• There were significant investment opportunities in this rapidly growing economy.

• Both Americans and the British benefited. We got a higher capital stock, while British investors earned a higher return than they could at home.

Investment and the Trade Balance

Trade after World War II

• At the end of WW II, the United States ran a significant current account surplus, for exactly the same reason. The War devastated Europe, and investment opportunities there were highly profitable.

Investment and the Trade Balance

Balance on Current Account

-5

-4

-3

-2

-1

0

1

2

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999

As % of GDP

When times are good, there are investment

opportunities and the trade balance is bad.

Investment and the Trade Balance

Balance on Current Account

-5

-4

-3

-2

-1

0

1

2

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999

As % of GDP

Investment and the Trade Balance

Balance on Current Account

-5

-4

-3

-2

-1

0

1

2

1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999

As % of GDP

Investment and the Trade Balance

Trade Deficits and Business Cycles

Investment and the Trade Balance

G-7 Experience

Investment and the Trade Balance

G-7 ExperienceDon’t invest in slow growing

countries

Investment and the Trade Balance

End

©2005 Charles W. Upton. All rights reserved