Transcript Lecture #1

Eco 3370
ppp #1
A Bird Eye View
of the Current* World Economy:
Trade and Finance
J.D. Han
King’s University College, UWO
*prior to the 2008 financial crisis
1
1. Current Fundamentals of World Economy
(U.S.)
(Asia, etc.)
Growth
Government
Budget
Deficits rises
Consumption
Rises;
Savings lags
Lack of
Investment
Managed
FOREX
Savings
Glut
Export
Promotion
s
Capital Flows
ㅇ low interests
ㅇ Asians buying U.S.
finan/real Assets
9.11
Current
Account
Deficits
(offsetting)
Current
Account
Surplus
External Liability
Position Imbalance
Current Account
Imbalance
2
2. Flows of Goods
U.S. is a voracious absorber of world products
particularly from the East Asia
U.S. Trade Decifits (Import in excess of Exports)
has been the largest and increasing rapidly while
the East Asian countries have been accumulating
Trade Surplus with U.S.
- International Currencies(monies) flow to the East
Asia
The East Asia is becoming the ‘Factory of the
World’
3
World: Current Account Trends of Major Countries
(100 Million $)
2004
1987
1997
-1,607
-1,409
-6,681
EU 15
Countries
252
883
477
Japan
844
968
1,721
Asia 7
Countries1)
284
367
1,678
(China)
3
370
687
(Taiwan)
180
71
186
(Korean)
101
-84
276
Latin America
-98
-668
173
-73
141
909

U.S.




Middle East
OPEC

Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and Indonesia
Data : IFS, Bloomberg
4
World: Current Account Deficits
(100 million U.S. $; %)
1987
10 Largest Deficits
2004
-2,254
(84.5)
10 Lagest Deficits
-1,607
(60.2)

U.S.
Canada
-134
(5.0)


U.K.
-126
(4.7)

Saudi Arabia
-98

Australia

-8,719
(92.9)
-6,681
(71.2)
Spain
-492
(5.2)

U.K.
-419
(4.5)
(3.7)

Australia
-400
(4.3)
-80
(3.0)

Turkey
-155
(1.7)
India
-52
(1.9)

Italy
-151
(1.6)

France
-44
(1.7)

Greece
-131
(1.4)

Argentina
-42
(1.6)

Portugal
-127
(1.4)

Norway
-41
(1.5)

Hungary
-88
(0.9)

Denmark
-30
(1.1)

Mexico
-74
(0.8)


U.S.
Note : 1) ( ) has the share in the world
Sources : IFS, Bloomberg
5
World: Current Account Surplus
(100 million $, %)
1987
10 countries
2004
1,862
(96.6)
10 countries
6,343
(73.6)

Japan
844
(43.7)

Japan
1,721
(20.0)

Germany
469
(24.3)

Germany
1,034
(12.0)

Taiwan
180
(9.3)

China
687
(8.0)

Korea
101
(5.2)

Swiss
602
(7.0)

Swiss
63
(3.3)

Russia
599
(7.0)

South Africa
51
(2.6)

Saudi Arabia
315
(6.0)

Kuwait
46
(2.4)

Norway
344
(4.0)

Mexico
42
(2.2)

Sweden
285
(3.3)

Netherlands
42
(2.2)

Singapore
279
(3.2)

Malaysia
26
(1.3)

Korea
276
(3.2)
Note : 1) ( )has the share in the world
Data : IFS, Bloomberg
6
Current Account Trends of U.S.: ‘Ever Increasing’
100
(billion S)
(%)
1
0
0
-100
-1
-200
-2
-300
-3
-400
-4
-500
-5
-600
Current Account Balance
-6
-700
Current Accout Bal./GDP
-7
-800
-8
-900
-9
80
82
84
86
88
90
92
94
96
98
00
02
04
*There is a big decrease in CA deficits to $390 billions in
2009 due to recession.
7
U.S.: Trade Deficits with
(100 mil. $, %)
1989
1997
2004
EU 15 countries
10
( 0.9)
167
( 9.2)
1,045
(16.0)
(Germany)
80
( 7.3)
186
(10.2)
459
( 7.0)
Japan
490
(44.7)
557
(30.5)
752
(11.5)
Asian 7Countries
333
(30.4)
795
(43.5)
2,270
(34.8)
(China)
62
( 5.6)
497
(27.2)
1,620
(24.9)
(Taiwan)
130
(11.9)
122
( 6.7)
129
( 2.0)
(Korea)
63
( 5.7)
-19
(-1.0)
198
( 3.0)
Latin America
92
( 8.4)
64
( 3.5)
841
(12.9)
Middle East OPEC
43
( 3.9)
-2
(-0.1)
221
( 3.4)
128
(11.7)
245
(13.4)
1,387
(21.3)
99
( 9.1)
179
( 9.8)
668
(10.3)
1,096
(100.0)
1,826
(100.0)
6,517
(100.0)
Others
(Canada)
Total
Note : 1) minus (-) indicates the U.S.’s surplus
Data : U.S. Government
In Sum: Trade deficits are moving from Japan to
China.
8
Updated statistics can be
found in many places, such as


http://www.epi.org/publications/entry/international_pict
ure_20100211
http://www.census.gov/indicator/www/ustrade.html
Basically the Situations involving
U.S. and East Asia or China
have not changed, but
accentuated.
9
Making a Sense in the Context of Macroeconomics
National Income Accounting:
Savings, Investment and Trade: U.S. and Major Partners
Blue- Saving
Red – Investment
Orange – Current Account
Observation:
1) Current account Deficits and Investment are + vely corrleated.
Current account Surplus and Investment are –vely correlated..
2)Current account Deficits and Savings are –vely correlated.
Current account Surplus and Savings are +vely correlated.
10
Let’s think about:
1. What will be the limit to the U.S. trade deficit?
2. How come the US can increase the trade deficits so much without any
constraint?
3. How come this flow of funds and the shifting of production(=income
generation) from the U.S. to East Asia does not decrease the National
Income of the U.S.?
4. Is there any interconnection between X-M, and S and I?
5. What about the causation in the above relationship? Which causes
which?
11
For above Question3:
What is happening to the component variables in
the following equations?
East Asian Countries’s GNP
Y=C+I+G+X-M
U.S.’s GNP
Y=C+I+G+X-M
12
For Q 4, and Q5, we will have a separate
appendix for the
National Income Accounting
13
3. Flows of Capital



International Liquidity does not
stay invested in the East Asia Monies are flowing back to U.S.
This fuels U.S. imports from Asia
This gluts U.S. financial market,
pushing Stock Prices up and
Interest Rates down
14
External Liabilities (Debts) Trends
(billion dollar)
1997(A)
2001
2003
2004(B)
Change
(B-A)
97-04
Cummulative
Current
Account
Deficits
<Major Deficits
Countries>

U.S.
-822
-2339
-2372
-2542
-1719
-3123

Australia
-186
-194
-358
-421
-235
-163

U.K.
-109
-104
-70
-372
-163
-211

Mexico
-
-248
-277
-310
-62
-44
958
1360
1613
1784
825
958
85
162
169
269
183
128
308
355
474
530
222
264
<Major Surplus
Countries>

Japan

Germany
Swiss

Singapore
-
71
88
88
16
85

Taiwan
-
226
337
387
161
91
Data : IFS
15
U.S.: Net External Liabilities (Debts)
=Credit from the rest of the World
(as of GDP, %)
30
25
20
15
10
5
0
-5
1980
1984
1988
1992
1996
2000
2004
-10
-15
16
Who are buying U.S. Bonds?
(100 mi. $)
1990~94
1995~99 (A)
Post 2000 (B)
Net (B – A)
2,710
5,890
18,280
9,690
 Asian
Countires
1,200
3,010
9,500
6,490
European
Countries
1,150
4,280
4,880
600
Latin
Americans
210
1,080
1,470
390
Total


Data: U.S. Government Documents
17
4. FOREX


International Capital Flows
accompany the imbalance of
Merchandise Flows (in the
opposite direction)
“Capital Flows (of Currencies) may
destabilize Relative Prices of
Currencies or FOREX rates”
18
U.S. : Current Accounts and Currency Value FOREX
(1billion
(%
150
400
125
200
100
0
75
50
25
-200
Current Account
External Value of $
0
-400
-600
-800
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
19


The U.S. Dollar has kept up its
value pretty well in light of the
worsening Current Account. Why?
If capital does not flow back from
East Asia to U.S., the U.S. Dollar
may have lost more values.
20
Recap. Current Fundamentals of World Economy
(U.S.)
(Asia, etc.)
Growth
Government
Budget
Deficits rises
Consumption
Rises;
Savings lags
Lack of
Investment
Managed
FOREX
Savings
Glut
Export
Promotion
s
Capital Flows
ㅇ low interests
ㅇ Asians buying U.S.
finan/real Assets
9.11
Current
Account
Deficits
(offsetting)
Current
Account
Surplus
External Liability
Position Imbalance
Current Account
Imbalance
21