Transcript Open Economy, Foreign-trade and Currency Policy Datei

Economics I
Open Economy, Foreign-trade
and Currency Policy (4h)
Open Economy
Foreign-trade and Currency Policy (4h)
•
The aim of the first lecture is to examine aspects of openness of the economy; the
main task is to answer the question on what basis is the international trade and why
national economies specialize - what is the relationship between foreign trade and
economy efficiency. There are also explained the causes of the international
movement of capital (financial assets) and defined the balance of payments, which
provides information about international movement of goods, services, income and
capital.
•
The objective of the second lecture lies in the analysis of foreign trade policy; task is to
analyze its goals and tools to influence key macroeconomic variables. The objectives of
the state, which are monitored in external trade policy, are part of the macroeconomic
policy and represent partial steps how to achieve the basic objectives of
macroeconomic stabilization policy. The main area is the regulation of foreign trade,
international capital flow, and regulation of foreign exchange rates – in terms of the
national economy and in terms of transnational coordination.
Content
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introduction – defining the goals
•
the openness of the economy
•
international trade and the efficiency of the economy (theory of absolute and
comparative advantages)
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dynamization of comparative advantages
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international capital flow
•
balance of payments
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foreign trade policy, its objectives and instruments
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protectionism - the objectives and consequences
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regulation of exchange rates and international capital movements
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international coordination of economic intervention
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conclusion – summary, homework
The openness of the economy
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= involvement in international economic relations (movement of
production, labor and capital as financial assets across borders of
national economies)
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real 4-sector model of the economy:
AD = C + I + G + NX
•
•
quantities for calculating the degree of openness of the economy:
i.
export/GDP
ii.
import/GDP
iii.
(export + import)/GDP
low and high degree of openness of the economies in the world
4
International trade and the efficiency of the economy
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causes of international trading:
a.
different natural and climatic conditions
b.
different preferences and tastes of consumers
c.
conflict between production and consumption
d.
implementation of the absolute advantage
e.
economies of scale
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international division of labor: manufacturing and consumer possibilities of
national economy are developing
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the theory of absolute advantage (the author is A. Smith)
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the theory of comparative advantage (the author is D. Ricardo) – it is
applied in economic practice
→ gains of trade
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Principle of absolute advantage
A. Smith (1723 – 1790)
Model: 2 states (state A, state B) produce only two goods of the same quality,
each state focus a half of its resources on the production of good x and
second half of the resources on the production of good y, assuming constant
returns to scale.
Question. How to increase the efficiency of the economies of countries A and
B? Or, How to increase aggregate production and consumption in both
countries, A and B?
Variable
good x
good y
State A
5
3
State B
4
6
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Principle of absolute advantage
international division of labor and gains of trade
State A focuses all resources on the production of good x and state B
focuses all resources on the production of good y. GDP in both countries
is higher and consumption is also higher (that is gains of trade).
Variable
good x
good y
State A
10
0
State B
0
12
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Principle of comparative advantage
D. Ricardo (1772 – 1823)
Model: 4 states (A, B, C and D) produce only two goods of the same quality, each state
focuses a half of its resources on the production of good x and second half of the
resources on the production of good y, assuming constant returns to scale. It is obvious
that state A has an absolute advantage in the production of both goods. If yes, how to
apply the principle of absolute advantage?
Question. How to increase the efficiency of the economies A, B, C and D? How to
increase GDP and consumption in the countries?
Variable
good x
good y
State A
10
6
State B
2
3
State C
2
3
State D
2
3
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Principle of comparative advantage
international division of labor and gains of trade
State A focuses all resources on the production of good x and states B, C and
D focus all resources on the production of good y. GDP of all countries is
higher and consumption is also higher (that means gains of trade).
Variable
good x
good y
State A
20
0
State B
0
6
State C
0
6
State D
0
6
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International capital flow
• the term „capital“
• the capital as financial assets
• financial flows: payment for traded goods, services, transfers, flow of
short-term and long-term capital
• international capital flow: the change in receivables and liabilities of
entities of the economy (residents) from abroad
• the main variables affecting the movement of financial assets: expected
return on financial assets, liquidity, risk
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Balance of Payments
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balance of payments records all economic transactions of entities in the
domestic economy to foreign countries for a certain period
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Balance of Payments (Czech Rep.): http://www.cnb.cz; Menu Statistics, Balance
of Payments
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balanced balance of payments = external balance of the economy
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the structure of the balance of payments (according to IMF
methodology)
–
horizontal (individual accounts) and vertical (debit and credit entries and
change in foreign exchange reserves)
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Horizontal and vertical structure of Balance of
Payments
• horizontal structure consists of single accounts of balance of payments
(according the methodology of the IMF):
– current account
– capital account
– financial account
– errors and omissions exchange differences
– change in reserves (exchange account), the negative sign means an increase in foreign
exchange reserves
• vertical structure: debit and credit entries and change in foreign exchange
reserves:
–
credit entries (+): export, the influx of income and transfers, import of capital (increase in liabilities, decrease in
receivables)
–
debit entries (-): import, the outflow of income and transfers, export of capital (reduction in liabilities, increase in
receivables)
–
increasing foreign exchange reserves: sign (-) and reduction of foreign exchange reserves: sign (+)
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The causes and forms of external imbalances
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current account imbalance, indicator: the share of current account
deficit to GDP
–
causes of current account imbalance: development of domestic and foreign GDP,
the development of aggregate price level in the domestic economy and abroad, the
development of exchange rates, external trade and monetary policy, changing
consumer preferences ...
• Balance of Payments consists of current and capital account, there is a
possibility of compensating balances
• causes of imbalances: factors influencing NX and international capital flow
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Consequences of external imbalance
• NX > 0: the increase in foreign assets or a decrease in foreign liabilities
(decrease in foreign debt )
• NX < 0: decline in foreign assets and increase in foreign liabilities (increase
in foreign debt)
• special conception of external equilibrium: NX deficit is
compensated by the influx of FDI
• long term external imbalance: imbalance of current account and capital
account: change in foreign exchange reserves, influencing macroeconomic
variables (GDP, and aggregate price level)
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Foreign trade policy, its objectives and instruments
• objectives of foreign trade policy: to influence macroeconomic variables
(employment, general price level)
• liberalization of foreign trade vs. protectionism
• indirect (market) and direct (administrative) tools:
1.
indirect tools: central bank interventions at foreign exchange markets, the
macroeconomic policy with the effect on the balance of payments
2.
direct tools – e.g. duties, import quotas, export premium (subsidies), tax
relief, invisible barriers to imports…
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Basic relationships between foreign-trade and currency policy and
macroeconomic variables
tariffs and
quotas
export subsidies,
invisible barriers ...
price stability
AS
x
AD
employment
currency
interventions
Effect of imposition of tariff on imported production
P
AS (S)
Pw – world price
The distance AB
represents import without imposing tariff.
PE
Pc
Pw
C
D
A
Yd
B
YE
Yw
AD (D)
The distance CD
represents import after the imposition of
the tariff.
Y (Q)
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Protectionism - the objectives
• protection of domestic producers, maintaining employment
• efforts to address the structural problems of the economy (the effort to
keep the industry which would otherwise lapse, educational
protectionism, efforts to reduce structural unemployment)
• influence the evolution of terms of trade (Terms of Trade), assuming a
decline in demand for foreign goods and the consequent decrease in
prices and consumption growth
• retaliatory protectionism - imposition of retaliatory duties in response to
reduced foreign demand, the introduction of import duties abroad,
antidumping
• non-economic objectives: military-political, environmental, support for
research and development
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Protectionism - the consequences
• loss of consumer surplus (microeconomic view)
• weakening enforcement comparative advantages → restriction of
production and consumption potential of the economy
• possible retaliation trading partners
• reducing the competitiveness of domestic products (an inability to reduce
costs), reducing net exports (NX)
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Theorem of locomotive and the effect of imported
inflation
It means the interaction of output between 2 states (+ conditions).
Yr
MA
of state A, „mpm“ is given
current account worsens in state A and
MB
a
XA
and
XB
Yr in state B
current account improves in state A…
It depends on where the actual product is. If the economy reaches
the level of potential output (Y*), theorem of locomotive moves in an
effect of imported inflation.
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Regulation of exchange rates
and international capital flow
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regulation of foreign exchange rates: central bank interventions at the
international foreign exchange market (buying or selling foreign
currencies in order to influence the exchange rate)
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restrictions on the flow of “hot capital”
• foreign exchange restrictions (extreme case - a ban on foreign
access to domestic financial markets)
• capital returns tax on international financial assets
• changes in interest rates by the central bank
•
stimulation of FDI inflow - investment incentives (much discussed,
usually limited in time)
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Regulation of exchange rates
• exchange rate can be fixed or flexible (free floating or managed floating)
• depends on the exchange rate, the attitude of the authorities to the
development of the exchange rate, with free float the central bank does
not intervene at the foreign exchange market
• sterilized and unsterilized foreign exchange intervention (sterilized
foreign exchange intervention does not change the money supply)
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International coordination of economic intervention
• coordination in the global economy is desirable; international business
development deepens the interdependence of national economies
• reducing barriers to international trade: the free flow of goods and
services, labor and capital, coordination of exchange rates
• international monetary systems - the systems of foreign exchange markets,
where capital flows and payments are funded within international trade
and also exchange rates between national currencies are determined
• macro-economic integration: the gradual blurring of national economies
boundaries
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Economic integration
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microeconomic vs. macroeconomic integration
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functionalist vs. institutional approach to economic integration
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the degrees of economic integration:
1.
free trade zone,
2.
customs union,
3.
united market,
4.
economic union,
5.
full economic integration (full economic and political integration)
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Literature
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FRANK, R. H., BERNANKE, B. S. Principles of Macroeconomics. 3rd Edition. McGrawHill/Irwin: NY, 2007. ISBN 978-0-07-319397-7. 561 p.
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MANKIW, G. N. Principles of Macroeconomics. 4 th ed. USA: Thomson SouthWestern, 2007. 583 p. ISBN 978-0-324-23695-8.
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McCONNELL, C. R., BRUE, S. L. Economics: Principles, Problems, and Policies. 17th
ed. NY: McGraw/Irwin. 716 p. ISBN 978-0-07-312663-0.
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SAMUELSON, P. A., NORDHAUS, W. D. Economics. 15th ed. McGraw-Hill, 1995.
Internet sources
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Czech National Bank. Balance of Payments Statistics. Available at www:
http://www.cnb.cz.
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World Trade Organization. Available at www: http://www.wto.org.
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The European Union. Available at www: http://www.europa.eu.
Homework
Exercise “Open Economy”
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Assume an economy consisting only of two consumers: Adam and Eve. Adam and
Eva work every day, Eva is able to catch 4 fish or collect 16 cups of berries per day,
Adam is able to catch 6 fish or collect 12 cups of berries per day. Assuming
constant returns to both consumers. If both consumers spend half a day for
catching fish and half a day for the berry picking, what is their total output? How is
the specialization of Adam and Eve on individual activities, if they want to achieve
higher output? What is the maximum output they can reach after the
specialization?
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Discuss the effect of rising costs when increasing the volume of production within
the gains of international trade, if countries decide to apply the principle of
comparative advantage.
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Find out on the internet, what the abbreviations GATT and WTO mean. Put down
some notes.
Homework
Exercise “Foreign-trade and Currency Policy”
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Find the website of the Czech National Bank (http://www.cnb.cz), menu Statistics,
Balance of Payments Statistics, and record the balance of each account balance of
payments in the last reporting quarter in CZK. What is the impact on
macroeconomic variable if there is a negative balance of foreign exchange
reserves? And what is the influence of a positive balance of foreign exchange
reserves? Why does minus sign indicate an increase and why does plus sign
indicate decrease in foreign exchange reserves?
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Graph the situation at the aggregate market of an economy, which is characterized
by greater efficiency in production and supplies its goods and services at lower
prices in comparison with the prices at the world market. Describe the graph.