UEBiTS Berlin and Hamburg Summer term 2018 wwwkoothsdebitsie Contact data Prof Dr Stefan Kooths Head of Forecasting Center Kiel Institute for the World Economy Office Berlin In den Ministergärten ID: 797493
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Slide1
International Economics
Prof. Dr. Stefan Kooths
UE/BiTS Berlin and Hamburg
Summer term 2018
www.kooths.de/bits-ie
Slide2Contact data
Prof. Dr. Stefan Kooths
Head of Forecasting Center
Kiel Institute for the World Economy
Office Berlin
In den
Ministergärten
8
10117 Berlin
030/2067-9664
stefan.kooths@ue-germany.com
www.kooths.de
Slide3The Kiel Institute for the World Economy
Forecasting Center
Slide4Be smarter than your phone …
Slide5Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide6Outline
Introduction and Overview
Motivation, key questions, and methodology
Course scheme
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide7Global production and international trade 1980-2016
Average growth:
GDP: 3.5 percent
Trade: 5.3 percent
Slide8Drivers of Globalization (overview)
Liberalization of world trade
Liberalization of cross-border capital flows
Collapse of centrally-planned economies
Increased political/social stability
Improved transportation infrastructure
Progress in telecommunication systems/internet technologies
Creation of economic blocs (e.g. EEC/EU, NAFTA, MERCOSUR)Spread of technological know-how via FDIBetter education for more people
Slide9Effects of Globalization (overview)
Generally: More choices (deeper markets)
More competition on world markets
Increased number of tradable goods and services
More alternatives for production sites
(globally integrated value-added chains)
Accelerated structural change/more innovations
(pressure on domestic labor markets)Regulatory arbitrage, pressure on tax and transfer systems(less latitude for national policies)Intensified international dependencies
Net gains, but domestic winners and losers (preview)
Slide10Globalization at work
Source: OECD (2014),
Understanding National Accounts
, p. 481
Slide11Poverty and inequality
#1 poverty eraser: Capitalism
Mass production …
… for mass consumption
Income distribution: Global view
Global convergence …
… within-country divergence
Globally improved working conditions
Consumption possibilities
Longer lifetimes
Gains from globalization/technological progress
Household composition matters
Identifying losers is not trivial
Slide12Global income inequality is shrinking …
Slide13… as is global poverty
Slide14Working conditions: Occupational injuries
Slide15Consumer perspective:Gains from global free trade
Low income households: higher expenditure share for tradable goods
Global competition and division of labor make tradable goods more affordable
World trade is mainly trade in mass production
Source:
Fajgelbaum
, P. D., &
Khandelwal
, A. K. (2014). Measuring the unequal gains from trade. NBER WP 20331
Slide16Why „International Economics“ is different (and why it is not)
Key economic questions (
not
specific to IE)
(International) division of labor
(International) allocation of production factors
Uniform microeconomic foundations and macroeconomic analysis
Country borders and the nation stateFactor mobility (labor, capital)Legal frameworks, fiscal policyNational money and exchange rate systems
Slide17Economics:Analysis of economic activity (= coping with scarcities)
Slide18International Economics:Analysis of cross-border economic activity
Slide19Methodological individualism
General method
Individuals as point of departure for economic analysis
Explaining social processes via actions of involved persons
Individuals …
… are diverse
… have exogenous preferences
… are capable of acting on their own… follow their vested interestSubjectivismIndividual preferences
No scientific inter-subjective comparisons of utility
Slide20Key first insights from methodological individualism
Trade = exchange of goods or services
Two-sided human interaction (social cooperation)
Based on voluntary contracts (implies mutual benefits)
Net gains from trade for both parties (no zero-sum game)
Pitfalls from aggregation/collectivist perspectives
Countries do not trade with each other, only individuals/firms do
Countries do not compete with each other, only individuals/firms doCompetitiveness is a relative concept
Countries (economic areas) consist of multiple marketsEach market comprises both the supply side and the demand side„Competitiveness“ not applicable to country level
Slide21Outline
Introduction and Overview
Motivation, key questions, and methodology
Course scheme
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide22Reading list
Literature
Eibner, W. (2006): “Understanding International Trade: Theory & Policy/
Anwendungsorientierte
Außenwirtschaft
:
Theorie & Politik”, Oldenbourg Verlag:
München/Wien.Hazlitt, H. (2008): “Economics in One Lesson”, Ludwig von Mises Institute: Auburn/Alabama.[https://mises.org/books/economics_in_one_lesson_hazlitt.pdf
]Kooths, S. and B. van Roye (2012): “Euro Area: Single Currency – National Money Creation”, Kiel Working Papers, No. 1787, Kiel.Pugel, T, A. (2016): “International Economics”, 16
th Edition, McGraw-Hill: New York.Snower, D., J. Boysen-Hogrefe, K.-J. Gern, H. Klodt
, S. Kooths, C.-F. Laaser, C. Reicher, B. van Roye, J. Scheide and K. Schrader (2013): “The Kiel Policy Package to Address the Crisis in the Euro Area”, Kiel Policy Brief, No. 58a, Kiel.
Course website: www.kooths.de/bits-ie
Slide23Reading
Pugel
(2016), Ch. 1
Hazlitt (2008), Ch. 1
Slide24Outline
Introduction and Overview
Cross-border Economic Activity
The Balance of Payments (
BoP
)
The International Investment Position (IIP)
Foreign Exchange Markets
International Financial Investments
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide25Direct vs. indirect exchange
Direct exchange (barter trade)
A
B
Requires double coincidence of wants
Indirect exchange (via money)
A
M, M BRequires M as generally accepted medium of exchange
Dramatic deepening of division of labor (specialization)
Allowing for open societies (complex and anonymous)Typical economic transactions involve payments
(= use of money for making purchases)
Slide26Recording cross-border transactions: Balance of Payments
Economic
area
inflow
outflow
Slide27CAPITAL AND FINANCIAL ACCOUNT
CURRENT ACCOUNT
Types of cross-border transactions
Trade flows
Goods (merchandise)
Services
Cross-border incomes
(compensation for use of production factors)
Labor: Compensation of employees
Capital: Investment income
Transfers
Current transfers (regularly)
Capital transfers (one-off)
Financial transactions
Nonofficial: Direct/Portfolio/Other investment
Central bank: Changes in official international reserves
Slide28BoP Accounting principles:Credit and debit items (double-entry bookkeeping)
Credit item
inflow of money
(measured with a positive sign/entry on the left side) …
… results from a
transaction for which the country must be paid
. It sets up the basis for a payment by a foreigner into the country – that is, it creates a
monetary claim on a foreigner
.
Debit item outflow of money(measured with a negative sign/entry on the right side) …
… results from a transaction for which the country must pay. It sets up the basis for a payment by the country to a foreigner – that is, it creates a monetary
liability against a foreigner.Double-entry system(sum of all credit entries = sum of all debit entries)
BUT: Statistical discrepancies („errors and omissions“)
Slide29Cross-border inflows and outflows as recorded in the
BoP
Transaction
Credit = inflow of money
Debit = outflow of money
Goods and services
Selling
Exports
Buying
Imports
Primary production factors (wages, interest, profits)
Selling
Factor export = income received
Buying
Factor import = income payed
Transfers (regular or one-off)
From
RoW
Transfers received
To
RoW
Transfers payed
Financial assets
Selling
Capital import
Buying
Capital export
Official international reserves
Selling
Capital import
Buying
Capital export
Slide30Balance of Payments: Key concepts
Flow-oriented framework for cross-border transactions
Specific time period (year, quarter, month)
NOT: Stocks (“balance sheet”)
Time of recording
Accrual principle
NOT: Actual Payment
PeopleResidents vs. Non-ResidentsNOT: Nationals vs. foreigners (passports do not matter)
Focus: Reporting country vs. RoW (= rest of the world)
Slide31Valuation: fob vs. cif (reporting country: Germany)
Exports: free on board (fob)
Imports: cost, insurance, freight (
cif
)
fob
cif
Slide32The detailed BoP structure (IMF BoP
Manual)
IMF Balance of Payments Manual
http://www.imf.org/external/pubs/ft/bopman/bopman.pdf
Slide33Real-life BoPs
Statistical Discrepancies
=
Net Errors and Omissions
=
Balance on Unclassified Transactions
Slide34Example: U.S. Balance of Payments (2010, $
billions
)
Slide35U.S. Bureau of Economic Analysis
Data on International Transactions
https://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#
Slide36 MB
Financial
markets
IIP
GNI
GDP
Interpreting
BoP
balances: First glance
Trade balance (NX)
Net goods exports of goods and services
Current account balance (CAB)
NX + net exports of factor use + net received current transfers
Net external lending (NEL)
CAB + net received capital transfers
Financial account balance,
exl
. official reserves (FAB)
Net selling of nonofficial financial assets
Overall balance / official settlements balance (OB)
Increase of official reserve assets (
R = NEL + FAB)
Slide37Accounting exercise (Reporting country: USA)
At the end of the year, Northern Illinois (a U.S. utility company) buys $34 million in natural gas from a Canadian firm. It does not pay in cash immediately, but instead issues a promissory note saying it will pay the bill (plus interest that will accrue over time) one year later.
Brazilian soccer fans spend $6 million as tourists in the U. S. during a soccer tournament, and they pay for their hotels, meals, and transportation by using the deposits that they have at a New York bank.
The U.S. Treasury pays $25 million in interest on its past borrowing from Swiss investors, paying with checks on a New York bank.
The U.S. monetary authority (Fed) in its official role becomes concerned that the exchange rate value of the dollar may appreciate against the Japanese yen. It decides to purchase yen-denominated bank deposits from a major Tokyo bank and pay by transferring $15 million of its New York bank deposits to this Tokyo bank.
The U.S. government gives $8 million in foreign aid to the government of Egypt in the form of wheat from U.S. government stockpiles.
Mexican immigrant workers in the U.S. send $2 million from their bank accounts at a Phoenix-based bank as remittances to their families in Mexico.
Slide38Outline
Introduction and Overview
Cross-border Economic Activity
The Balance of Payments (
BoP
)
The International Investment Position (IIP)
Foreign Exchange Markets
International Financial Investments
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide39Linking BoP and IIP
Stocks (IIP) vs.
flows
(
BoP
)
International Investment PositionTransaction-based accumulation of flows
Revaluations of stocksNet External Lending (NEL)CAB = Current Account BalanceNCT = Net Capital TransfersNEL
t = CABt + NCTt
Transaction-based IIPIIPt = NELt
+ NELt-1 + NELt-2 + NELt-3 + NELt-4 + … +
NELt-
Slide40Germany: Current account, capital transfers, and IIP
Slide41Outline
Introduction and Overview
Cross-border Economic Activity
The Balance of Payments (
BoP
)
The International Investment Position (IIP)
Foreign Exchange Markets
International Financial Investments
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide42Exchange rates
Exchange rate: e
Price of one nation‘s money (e.g. USD) …
… in terms of another nation‘s money (e.g. EUR)
Euro area view: e = 0,81 [€/$]
United States view: e = 1,23 [$/€]
Time dimension
Spot rate: price for immediate exchange: eForward rate: price set now for an exchange in the future: f
Slide43Exchange rate systems: Terminology
Flexible exchange rate
Appreciation (e
)
Depreciation (e
)
Synonym
Floating exchange rate
Fixed exchange rate
Revaluation
(e
)
Devaluation
(e
)
Synonym
Pegged exchange rate
Slide44More than two currencies: Currency arbitrage
Exploiting price differentials
Between trading centers (NY, London, Frankfurt, Tokyo, …)
Between multiple currencies
1,6 [USD/GBP]
0,9 [USD/CHF]
0,5625 [GBP/CHF]
1,6 [USD/GBP]
1,0227 GBP 0,9 [USD/CHF]
1,6363 USD
0,55 [GBP/CHF]
1 GBP = 1,8181 CHF
Slide45Transaction
Credit = inflow of money
Debit = outflow of money
Goods and services
Selling
Exports
Buying
Imports
Primary production factors (wages, interest, profits)
Selling
Factor export = income received
Buying
Factor import = income payed
Transfers (regular or one-off)
From
RoW
Transfers received
To
RoW
Transfers payed
Financial assets
Selling
Capital import
Buying
Capital export
Official international reserves
Selling
Capital import
Buying
Capital export
Cross-border flows and the foreign exchange market
Supply of
foreign exchange
Demand for
foreign exchange
Slide46Demand for and supply of foreign exchange
Demand-side
Im
: Imports of goods, services, and factor usage + transfers payed
CapEx
: Capital export (buying financial assets)
Supply-side
Ex: Exports of goods, services, and factor usage + transfers received
CapIm: Capital import (selling financial assets)
Slide47Foreign exchange market(example: USD vs. EUR, euro area view)
Exchange rate
[EUR/USD]
Transaction volume [USD]
Supply (
Ex+CapIm
)
Demand (
Im+CapEx
)
eM
Slide48Reading
Pugel
(2016), Ch. 16 + 17, and Appendix E
Slide49Outline
Introduction and Overview
Cross-border Economic Activity
The Balance of Payments (
BoP
)
The International Investment Position (IIP)
Foreign Exchange Markets
International Financial Investments
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide50Exchange rate risk and speculation
Future payment in foreign currency
exchange rate risk
Slide51Hedging and forward exchange contracts
Slide52Futures, Options, Swaps
Slide53The “Lake” model
Slide54Covered and uncovered transactions
Covered
Forward contracts
Only counterparty risk
Uncovered
Expectations (expected future spot rates)
Exchange rate risk
Slide55Interest parity (US vs. EMU, EMU perspective)
Covered interest differential
CD = (1+i
US
)
f/e – (1 +
i
EUR)Forward
premium: F = (f – e)/eCD F + (
iUS –
iEUR)Expected uncovered interest differential
EUD = (1+iUS)e
ex/e – (1 + i
EUR
)
Expected
appreciation
:
F
ex
= (
e
ex
– e)/e
EUD
F
ex
+ (
i
US
–
i
EUR
)
Annualized
F =
100
F
ex
=
100
of foreign currency (here: USD)
Slide56Reading
Pugel
(2016), Ch. 18
Slide57Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
General analysis of cross-border trade
Reasons for inter-industry trade:
Absolute and comparative advantage
Causes and consequences of cost differences:
The role of factor endowments and factor proportions
“Imperfect” competition and intra-industry trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide58Four basic questions about cross-border trade
Causes:
What determines which products are exported and imported?
Impact:
How does trade affect production and consumption in each country?
National gains:
How does trade affect the economic well-being of each country?
Intra-national winners and losers :How does trade affect the distribution of economic well-being among various groups within a country?
Slide59Categories of trade
Non-availability (trade in commodities)
Inter-industry trade (specialization)
Intra-industry trade
Slide60Product markets: General assumptions, demand and supply, consumer and producer surplus, elasticities
Slide61Opening for external trade: National and international markets
Slide62Arbitrage and free-trade equilibrium
Slide63Terms of trade
Slide64Four basic answers to trade
Slide65Reading
Pugel
(2016), Ch. 2
Hazlitt (2008), Ch. 15
Slide66Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
General analysis of cross-border trade
Reasons for inter-industry trade:
Absolute and comparative advantage
Causes and consequences of cost differences:
The role of factor endowments and factor proportions
“Imperfect” competition and intra-industry trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide67Adam Smith: Theory of absolute advantage
Maximum number of working hours: 10 (millions, billions, …)
Production and consumption possibilities without trade
(self-sufficiency)?
Consumption possibilities with trade and specialization
(division of labor)?
Working hours
per ton of wheat
Working hours
per barrel of wine
Country A
2
5
Country B
2,5
4
Adam Smith (1723—1790)
An Inquiry into the Nature and Causes
of the Wealth of Nations, 1776
Slide68David Ricardo:Opportunity cost and theorem of comparative advantage
Maximum number of working hours: 10 (millions, billions, …)
Production and consumption possibilities without trade
(self-sufficiency)?
Any chance for mutually beneficial trade (division of labor)?
David Ricardo (1772—1823)
On the Principles of Political Economy and Taxation, 1817
Working hours
per ton of wheat
Working hours
per barrel of wine
Country A
2
5
Country B
1
4
Slide69Production-possibility curve
Slide70Exchange rate and terms of trade
Slide71Complete vs. incomplete specialization: Constant vs. increasing marginal cost
Slide72Preferences and trade patterns
Slide73Country size and relative international winners
Slide74Reading
Pugel
(2016), Ch. 3
Slide75Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
General analysis of cross-border trade
Reasons for inter-industry trade:
Absolute and comparative advantage
Causes and consequences of cost differences:
The role of factor endowments and factor proportions
“Imperfect” competition and intra-industry trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide76Factor proportions and factor endowments
Factor proportions
Factor intensity used in production of goods
Labor-intensive good:
Ratio of
labor to other factors is high
relative to
other goods(share of labor costs is high relative to other goods)Factor endowmentsAvailable factor resources within a countryLabor-abundant country:
Ratio of labor to other factors is high relative to the rest of the world
Slide77Shares of the world‘s factor endowments (2007/2010)
Slide78The Heckscher-Ohlin theory and income distribution
Two countries, two factors, two goods (2-2-2 model)
Fixed and fully employed factor supplies
Mobile between sectors within each country
Immobile between countries
Same consumption patters in both countries
Same (constant-return-to-scale) production technologies in both countries
Trade explanation by H-ODifferences across countries in the relative availability of factorsDifferences across products in the use of these factors
A country exports products that use its relatively abundant factor(s) intensively and imports products that use its relatively scarce factors intensively
Slide79Short-run and long-run effects:National losers and winners (1/2)
Slide80Short-run and long-run effects:National losers and winners (2/2)
Slide81The Stolper-Samuelson theorem and factor price equalization
Slide82The Leontief-paradox and empirical evidence
Slide83Case study:
11 mistakes about free trade (in less than 3 minutes)
www.kooths.de/zdf-anstalt-freihandel
(in German)
Slide84Reading
Pugel
(2016), Ch. 4 and 5
Slide85Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
General analysis of cross-border trade
Reasons for inter-industry trade:
Absolute and comparative advantage
Causes and consequences of cost differences:
The role of factor endowments and factor proportions
“Imperfect” competition and intra-industry trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide86Intra-industry trade (overview)
Intra-industry trade
Exports and imports in the same product category
Main drivers and explanations
Product differentiation (monopolistic competition)
Substantial internal scale economies (global oligopolies)
External scale economies (regional spill-overs, industry clusters)
Slide87Measuring intra-industry trade
United States, selected products (2009)
Average percentage IIT-shares in non-food manufactured products
Slide88Internal and external scale economiesand complete specialization
Slide89Monopolistic competition
Preferences for variety and product differentiation
Some internal scale economies (decreasing average cost)
Easy market entry and exit in the long run
Mild form of “imperfect” competition
Slide90Global oligopolies
Substantial internal scale economies (few large firms)
Path-dependency for firm locations
Oligopoly pricing (interdependence, game theory)
Stronger form of “imperfect” competition
Slide91External scale economies: Industry clusters
Spill-overs and regional clusters:
Size of the entire industry in one location matters
Home market
Path-dependency, luck
Government interventions
Slide92Summary: Gains and losses from international trade
Slide93Reading
Pugel
(2016), Ch. 6
Slide94Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide95Barriers to free trade
Tariffs (= taxes on external trade flows)
Nontariff barriers (= all other trade-related interventions)
Slide96Goals of protectionism
…
Economic analysis:
Instrument suitable for reaching target with minimum cost?
Slide97Fairness in complex open societies
Atavistic instincts
Solidarity, altruism
Aggression against outsiders
Stabilizing small groups (families, tribes, clubs)
Extended order: Markets
(Popper, Hayek)
Exchange, contracts, moneyTrust, reputation
CompetitionNon-aggression, openness, voluntary cooperationEnabling anonymous societies (use of dispersed knowledge)
Fairness (justice)
= Supremacy of abstract rules
Slide98Key abstract rules in the market economy (see: EP+MR)
Respect for private ownership (property rights)
Free choice of trading partner (worldwide)
Accepting pecuniary external effects (= competition)
Accountability (socially functional wealth positions)
Pattern prediction only
Slide99Mercantilist atavism: „Buy German“
Slide100Case study: Transatlantic economic ties (1/2)
Trade channel and FDI positions
Slide101Case study: Transatlantic economic ties (2/2)
FDI positions as protection against protectionism?
Bilateral trade balance
EU-surplus: 115 bn. Euro
Germany: 49 bn. Euro
Export shares
From EU to U.S.: 16 percent
From U.S. to EU: 11 percent
FDI positions
From EU to U.S.: 32 percent
From U.S. to EU: 50 percent
Slide102Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide103Tariff as a tax on imports
Types of tariffs (custom duties)
Specific tariff (per unit)
Ad valorem tariff (relative to value)
Slide104The global tariff map
Source
:
https://www.wto.org/english/res_e/statis_e/statis_maps_e.htm
Slide105Effect on domestic producers
Slide106Effect on domestic consumers
Slide107Government revenues
Slide108Net national effect
Slide109Terms-of-trade effect: Small vs. large countries
Slide110Nationally „optimal“ tariffs
Slide111Reading
Pugel
(2016), Ch. 8
Hazlitt (2008), Ch. 11
Slide112Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide113Neo-protectionism via non-tariff barriers to trade
Source: WTO, World Trade Statistical Review 2016.
Slide114Types of nontariff barriers
Slide115Import quotas: Small country analysis
Slide116Allocating import licenses
Fixed favoritism
Auction
Resource-using procedures
Slide117Import quotas: Large country analysis
Slide118„Voluntary“ export restraints
Slide119Other nontariff barriers
Product standards
Domestic content requirements
Government procurement
Minimum labor market standards
Local environmental standards
Slide120Reading
Pugel
(2016), Ch. 9
Slide121Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide122Dumping vs. fair market value
„Normal“ value
Comparative (prices charged in domestic market)
Cost-based (selling below average cost)
Slide123Types of dumping
Predatory
Cyclical
Seasonal
Persistent (price discrimination)
Slide124Small exporting country analysis
Slide125Large exporting country analysis
Slide126Retaliation
Slide127Strategic trade policy: Boing vs. Airbus (1/2)
Slide128Strategic trade policy: Boeing vs. Airbus (2/2)
Slide129Reading
Pugel
(2016), Ch. 11
Slide130Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide131Stages of economic integration
Slide132Regional economic integration
Source: http://en.wikipedia.org/wiki/File:Economic_integration_stages_(World).png
Slide133EU citizens‘ attitudes towards TTIP
Slide134Trade creation and trade diversion
Slide135Other effects of economic integration
Increase in competition (reducing monopoly power)
Lower prices (static efficiency)
Higher productivity/lower cost of production (dynamic efficiency)
Lower cost by expanding scales of production
More opportunities for business investments (FDI)
Slide136Case study: The European Union
Slide137Trade embargoes
Slide138International trade disputes
Slide139GATT (1947)
WTO (1994)
Source
:
www.wto.org
(2018)
Slide140Reading
Pugel
(2016), Ch. 12
Slide141Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Protectionism: Goals and instruments
Tariffs
Nontariff-barriers to trade
Export subsidies (dumping)
Economic integration and multilateral trade policy
Free trade: Pros and cons
Open-Economy Macroeconomics
Summary: The Key Lessons Learnt
Slide142First best vs. second best
Slide143Costs of protection
Loss of welfare (deadweight losses)
Foreign retaliation
Enforcement costs
Rent-seeking costs
Rents to foreign producers (VERs)
Dynamic inefficiencies (loss of dynamic efficiency)
Slide144Externalities
Slide145Promoting domestic production or employment
Slide146The infant industry/dying industry arguments
Slide147Public revenues
Slide148Noneconomic objectives
„National pride“
National defense
Domestic income redistribution
Slide149Reading
Pugel
(2016), Ch. 10
Slide150Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
The Open-Macroeconomy
Foreign exchange and monetary policy
Exchange rate movements
Summary: The Key Lessons Learnt
Slide151 MB
Financial
markets
IIP
GNI
GDP
Interpreting
BoP
balances (revisited)
Trade balance (NX)
Net goods exports of goods and services
Current account balance (CAB)
NX + net exports of factor use + net received current transfers
Net external lending (NEL)
CAB + net received capital transfers
Financial account balance,
exl
. official reserves (FAB)
Net selling of nonofficial financial assets
Overall balance / official settlements balance (OB)
Increase of official reserve assets (
R = NEL + FAB)
Slide152Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
The Open-Macroeconomy
Foreign exchange and monetary policy
Exchange rate movements
Summary: The Key Lessons Learnt
Slide153Economic system (monetary flows): Surplus and
deficit
sectors
Capital market
Gross income
Taxes
Transfers
Households
Firms
Government
RoW
Private consumption
Public consumption and investment
Private investment
Savings
Public
budget
deficit
Private
investment
Net exports
Exports
Imports
Slide154Economic system (monetary flows): Financial intermediation
Capital market
Gross income
Taxes
Transfers
Households
Firms
Government
RoW
Private consumption
Public consumption and investment
Private investment
Savings
Public
budget
deficit
Private
investment
Net exports
Exports
Imports
Slide155Financing trade imbalances: The extended IS-identity
S = I + BD + NX
NX
Cross border capital flows
Physical (goods and services)
Financial (claims on future goods and services)
Slide156Domestic vs. national concept
Domestic
concept
Economic activity within country borders
(irrespective of who owns the production factors, either residents or non-residents)
National concept
Economic activity using production factors owned by residents
(either domestically or abroad)
Domestic vs. foreign economic units:
Only residency matters
(nationality does not).
Slide157Production and income generation: Value added
Value added
=
production
minus
intermediate consumption
Production: Total output at market prices
Intermediate consumption: Produced goods used up (“consumed”) in the production process (secondary production factors)
Value added: Compensation (= income) of primary production factors
Land/natural resources (rent)Labor (wages)Capital (interest and rent)
Entrepreneurial activity (profits)
Originary
PF/income
Primary
PF/income
Slide158Macroeconomic production and product account
Source
Use
Domestic production
(at market prices)
X
MP
Net taxes on products NTP
(Taxes on products TP
– subsidies on products) SP
Domestic production X
BP
(at basic prices)
Intermediate consumption
V
Final use
Final domestic use
Consumption C
(private and public)
Gross investment I
(private and public)
Exports Ex
Imports
Im
GDP
GDP
GDP = Gross Domestic Product at market prices
Slide159GDP: Production-side approach
Domestic production at basic cost
–
Intermediate consumption
=
Gross value added
+
Taxes on products– Subsidies on products
= Gross Domestic Product at market prices
Slide160GDP: Expenditure-side approach
Consumption*
+ Gross Investment*
Change in inventories
Gross fixed capital formation
(machinery, buildings, software, R&D)
+ Exports*
Goods (commodities)Services– Importe*Goods (commodities)Services= Gross Domestic Product at market prices
*at market prices
Final
domestic
use=
Domestic absorption
Net exports
=
Trade surplus
Slide161Pitfalls of hydraulic macro accounting:
“
Final
aggregate
demand
”: No demand and not all of it is final
Intermediate consumption
(production structure)
Source (not: supply)
Use (not: demand)
Macroeconomic goods and services account
(for period t)
Gross Domestic Product
(domestic value added)
Imports
Intermediate consumption
(production structure)
Final consumption
(exclusive source of value)
Domestic capital formation
Exports
Capital formation abroad
IC + GDP + IM = IC + C + I + Ex
GDP + IM = C + I + Ex
GDP = C + I + Ex -
Im
Slide162Disclaimer 2: Expenditure-side components no “drivers” of GDP
BIP = C + I + NX
BIP
= C
pr
+ C
gov + Ipr
+ Igov + Ex – ImBIP = Cpr + Ipr + G + Ex – Im
G = Cgov + IgovNX = Ex – Im
GDP + Im = Cpr + Ipr + G + Ex (source of goods ≡ use of goods)In principle, all products contain domestic and foreign value-addedC ≠ BIP
(e.g. imports my vary)Im ≠ – BIP (final use may)GDP definitions do not allow for causality!
by definition!
▼
Slide163Income from abroad
(188)
Income to foreigners
(135)
Gross Domestic Product (GDP) vs. Gross National Income (GNI)
German data for 2016; Source:
Statistisches
Bundesamt, Fachserie 18, Reihe
1.4
Domestic
concept
National concept
GDP
GNI
Domestic income to residents
(3009)
3144 bn. Euro
3197 bn. Euro
Slide164Economic growth and cross-border investments
Ultimate reason for production: Consumption goods
Drivers of growth (= production capacity)
Institutional framework (property rights)
Technology/knowledge
Capital stock
GDP
Domestic production/capital accumulation
GNI Production/capital accumulation worldwide
NX > 0Negative impact on GDPPositive impact on GNIIf GNI > |GDP| then positive impact on consumption
Slide165The mercantilist debate
Does a trade deficit reduce GDP?
Do net exporters exploit the rest of the world?
Mercantilism/protectionism revisited:
Is unbalanced trade unfair?
Slide166Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
The Open-Macroeconomy
Foreign exchange and monetary policy
Exchange rate movements
Summary: The Key Lessons Learnt
Slide167Foreign exchange market(example: USD vs. EUR, euro area view)
Exchange rate
[EUR/USD]
Transaction volume [USD]
Supply (
Ex+CapIm
)
Demand (
Im+CapEx
)
eM
Slide168Fixed exchange rates: Defending the peg (1/2)
Exchange rate
[EUR/USD]
Transaction volume [USD]
Supply
Demand
Excess supply
absorbed by
central bank interventions
(increase of official reserves)
R = MB > 0
Peg
eM
Slide169Fixed exchange rates: Defending the peg (2/2)
Exchange rate
[EUR/USD]
Transaction volume [USD]
Supply
Demand
Excess demand
provided by
central bank interventions
(decrease of official reserves)
R = MB < 0
Peg
eM
Slide170Official reserve assets and the role of the central bank
Special role of the central bank
Ultimate control of money supply
Provision of central bank money (MB = monetary base)
Domestic component (MBD)
International reserves (R)
MB = MBD + R
Free floating exchange rate system: R = 0Managed floating/fixed exchange rate system: R ≠ 0
Interdependency (monetary policy, exchange rate system)
Slide171Impossible trinity (or: monetary trilemma)
Monetary policy options
Free flow of capital (vs. capital controls)
Fixed exchange rate (vs. flexible exchange rate)
Sovereign monetary policy (vs. endogenous money supply)
Pick two, give up the third
Slide172Outline
Introduction and Overview
Cross-border Economic Activity
The Pure Theory of International Trade
Trade Policy: Free Trade vs. Protectionism
Open-Economy Macroeconomics
The Open-Macroeconomy
Foreign exchange and monetary policy
Exchange rate movements
Summary: The Key Lessons Learnt
Slide173Short run vs. long run analysis
Short-run
Asset market approach to exchange rates
(capital flows)
Long-run
Low of one price
Purchasing power parity(trade in goods and services)
Slide174Asset market approach and interest rate parity
Slide175Purchasing Power Parity (PPP)
Slide176Absolute vs. relative PPP
Slide177Monetary approach
Slide178Exchange rate overshooting
Slide179Reading
Pugel
(2016), Ch. 19 to 24
Hazlitt (2008), Ch. 12