Transcript No Slide Title - Stanford University

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
NET EXPORTS (BILLIONS OF DOLLARS)
(=EXPORTS - IMPORTS)
0
-25
-50
-75
-100
Trade deficit
because net
exports are less than zero
(exports are less than imports)
-125
-150
-175
1982
1984
1986
1988
1990
1992
1994
1996
BILLIONS OF
DOLLARS
1200
1000
Investment
800
GAP
600
400
National
saving
1982
1984
1986
1988
1990
1992
1994
1996
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
R
R
R
R
7.5
7.5
7.5
7.5
5.0
5.0
5.0
5.0
2.5
62.5
65.0
2.5
X
Y
Y
0.0
I
2.5
C
0.0
67.5
0.0
12.5
PERCENT
(a) Consumption Share
Y
15.0
17.5
PERCENT
(b) Investment Share
-2.5
0.0
2.5
NG
Y
0.0
2.5
75
PERCENT
(c) Net Exports Share
80
85
PERCENT
(d)
Nongovernment
Share
Long run effect of a direct
savings stimulus (U.S.)
22_
07
R
R
R
R
7.5
7.5
7.5
7.5
5.0
5.0
5.0
5.0
2.5
62.5
65.0
2.5
X
Y
Y
0.0
I
2.5
C
0.0
67.5
0.0
12.5
PERCENT
(a) Consumption Share
Y
15.0
17.5
PERCENT
(b) Investment Share
-2.5
0.0
2.5
NG
Y
0.0
2.5
75
PERCENT
(c) Net Exports Share
80
85
PERCENT
(d)
Nongovernment
Share
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
+ Services trade balance
= Overall trade balance (X)
+ Net factor income from abroad
+ Net transfers from abroad
= Current account balance
-186
87
-99
-9
-39
-147
31_02
BILLIONS OF
DOLLARS
Trade balance
(net exports)
50
0
-50
- 100
Current
account
balance
- 150
- 200
1982
1984
1986
1988
1990
1992
1994
1996
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 OF
DOLLARS
4,500
Foreign assets in U.S.
4,000
3,500
Net debtor
3,000
2,500
2,000
U.S. assets abroad
Net creditor
1,500
1,000
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
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 StanfordStanford 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