Transcript balance of trade

Applied Macroeconomics
Import : The purchase of goods and services from abroad .
Export : The sale of home goods and services abroad .
Re-Export : To export again what has been imported.
trade balance : A country's exports minus its imports ,the largest
component of a country's balance of payment. also called balance
of trade .
balance of payments : An accounting document that record all the
flows of money in and out of a country during one year .
Thanks to the balance of payment we can see if more money is
flowing into a country or more money is flowing out of a country,
and give us an indication of the competiveness of that country .
The balance of payment is spilt between two account the Current
account and the Capital account . So the flow of money in and out
of the country is either recorded in the current account or the
capital account .
The Balance of Payment ( BOP )
Current Account + Capital and Financial account = 0
Current Account =
- Capital and Financial account
Current Account surplus ( or deficit ) = Capital and Financial account deficit ( or surplus )
( X - M ) = KO – Ki
The Capital Account: an
account that record the flow of money as result of
public and private international investments flowing in and out of a country, which
includes foreign direct investment, plus changes in holdings of stocks, bonds, loans,
bank accounts, and currencies.
The Current account :
An account made of four components : it records flows of money as result of :
The current account
Trade in goods
Inflow ( + )
Outflow ( - )
Visible trade
Trade in services
Inflow ( + )
Outflow ( - )
Invisible trade
Profits and Income
Credit ( + )
Debit ( - )
Invisible trade
Current Transfers
Credit ( + )
Debit ( - )
Invisible trade
Each components could be negative and could be positive, If we combine these
elements and have a current account deficit that’s indicate that more money is
going out of a country than its going in, and generally this is considered to be
BAD NEWS.
Because
this implies that we are NOT competitive and implies that we MUST be
borrowing money to finance our over spending .
We Usually measure the Current account as a percentage of the GDP or GNP .
Gross Domestic Product (GDP) : is the total value of final goods and services produced
within a country's borders in a year.
GDP = C + I + G + (X - M)
Gross National Product (GNP) : is the total value of final goods and services produced in a
year by domestically owned factors of production.
GNP = C + I + G + (X - M) + NR
C=Personal consumption expenditures I=Gross private domestic investment
G=Government consumption expenditures X=Net exports of goods and services M=Net
imports of goods and services NR=Net income from assets abroad
1
Balance Of Trade : The difference between the value of the total exports and
the value of total imports of a nation during a specific period of time.
 The nominal value of exports equals the price index of exports times the
volume of exports .
X=Px.Xvolume
(export in nominal terms)
 The nominal value of Imports equals the price index of Imports times the
volume of imports .
M=Pm. mvolume
(export in nominal terms)
This means the balance of trade is:
BT = Px.Xvolume - Pm.mvolume
(balance of trade)
If we divided through by a price index such as the price of the import we obtain:
BT = PM[(PX/PM)X - M]
(balance of trade In real terms)
The balance of trade depends not only on the physical quantities of exports and
imports, X and M, but also on the price of exports divided by the price of imports.
This ratio is known as the Terms Of Trade ( TOT ) .
Terms Of Trade ( TOT ) : is the Relationship between the prices at which a
country sells its exports and the prices paid for its imports.
TOT = PX/PM
BT = PM[ ( PX/PM)X - M]
If the Terms Of Trade fall, for example, exports become cheaper relative
to imports this mean that more goods and services have to be exported to
pay for a given volume of import , the country is said to have
"deterioration in its Terms Of Trade “ and a decline in the trade balance .
Conversely, If a country's export prices rise relative to import prices, its
terms of trade are said to have moved in a favorable direction or
improving, since it now receives more imports for each unit of goods
exported, and will lead to an improvement in the trade balance .
BT = PM[ (PX/ PM)X - M]
2
What affects our demand for foreign goods and services and the demand from
the rest of the world for our products?
The main factor determining the level of exports and imports is the
competitiveness of UK producers compared with producers in other countries.
Now , What is the best measure of competitiveness??
 Price competitiveness: The most straightforward measures of competitiveness.
θ = (p. of foreign goods expressed in home currency)/(p. of home goods)
θ = P*.e/P
(price competitiveness, real exchange rate)
P* is the foreign price level, P is the UK price and e is the nominal exchange rate
measured in number of home currency per unit of foreign currency .
e = (no. of units of home currency)/(one unit of foreign currency)
e = ₤/€
(nominal exchange rate)
Defining e= ₤/€ as the domestic currency units for a foreign currency unit this
is only one convention the other convention is used as well as
foreign currency units for a domestic currency unit .
e= €/₤
is the
Two relative measures of competitiveness are :
 Relative producer prices (RPP) :
RPP = WP*.e/WP
It’s the ratio of foreign to UK wholesale prices.
 Relative export prices ( REP ) :
RPP = Px*.e/Px
It’s the ratio of foreign to UK export prices.
RPP = P*.e/Px
or
RPP = P*.e /WP
 Relative profitability of exporting (RPE):
RPE= Px/WP
– This is the ratio of export prices to domestic prices or the wholesale price
index.
– This is not a measure of international competitiveness, but it is useful because
it shows the extent to which changes in export prices reflect changes in the
profit margins on exports against home sales.
e= ₤/€
Px
RPE= Px/WP
 Relative unit labor costs (RULC) :
Unit labor costs in the UK are given by :
ULC = WL/Y = W/y
where W is the wage rate , L is labor employed, Y is output and y is domistic output per
unit of labor input (Y/L).
foreign Unit labor costs in the rest of the world :
ULC* = e.W*L*/Y* = eW*/y*
W* is the rest of the world’s wage rate, e is nominal exchange rate , L* is foreign labor
employed, Y * is foreign output and y* is foreign output per unit of foreign labor input
(Y*/L*).
If we take the ratio of foreign to UK unit labor costs we obtain the relative unit
labour costs (RULC):
RULC = ULC*/ULC = (e)(W*/W)(y*/y)
RULC thus depends on three things:
 the exchange rate (e).
 relative wage rates (W*/W).
 relative productivity levels (y*/y).
A raise in the RULC indicate a rise in the foreign costs relative to the UK costs ,
i.e. an improvement in the UK competiveness or a real depreciation in the RULC
and a fall of the RULC is a real appreciation and a fall in the UK competiveness.
A second way to measure RULC is what referred to as normalized relative unit
labour costs- RULC (N).
(RPP) Relative producer prices.
( REP ) Relative export prices.
(RPE) Relative profitability of
exporting.
(IPC) Import price competiveness
(RULC-N) Normalized relative
unit labor costs.
3
 Exports Function :
 Exports are the demand by the rest of the world for UK production .
 a variable that measure world demand :
- world GDP ( Y*) .
- world trade ( total world exports ).
 a variable that measure Competitiveness :
(RULC-N ) normalized relative unit labor costs.
 If we estimate a simple export equation we obtain the following:
Xt = 0.05WXt-1 - 0.29RULCt-1 + 40.2
where X is exports , WX is the world exports and RULC is relative unit labor costs .
 It implies that the ‘world trade’ elasticity of demand for exports is 0.84, that a 1 per
cent increase in world trade is associated with a rise of less than 1 per cent in UK exports.
This is consistent with the UK’s share of world exports having fallen progressively over
time as world trade has expanded.
 It suggests a low ‘price’ elasticity of demand, of around 0.35 .
Imports Function:
 Imports are the demand by the UK for rest of the world production.
 a variables that measure domestic demand :
- total final expenditure (TFE) = C + I + G + X
where C is consumption, I is investment, G is government expenditure and X is exports.
- excess capacity
 The justification for this is that when the economy is being run at a relatively high level
of demand , businesses will turn to imports because the goods they want are unavailable
at home.
 a variable that measure Competitiveness:
- (RULC-N ) normalized relative unit labor costs.
 If we estimate a simple import function we obtain the following:
Mt = 0.34TFEt-1 + 0.39RULCt-2 - 0.55XSCt - 78.7
M is imports , XSC is the measure of excess capacity , TFE total final expenditure and
RULC is the competitiveness measure .
 The income elasticity of demand of about 1.5 .
 Imports appear to be less responsive to relative unit labour costs than are exports, a
change in RULC takes 2 years to affect imports, but only one year to affect exports.
 if excess capacity falls by £ 1 billion, imports rise by £ 0.55 billion. This means that if
output rises without any rise in capacity the effective marginal propensity to import is
much higher than 0.34.
An alternative way of specifying this equation is to have the marginal propensity to import
depending on competitiveness. If we estimate such an equation we obtain:
Mt = aTFEt-1 - 0.57XSCt - 43.9
where
a = 0.25 + 0.001RULCt-2
This is the type of import function used in some macroeconomic models , It is easy to check
that it gives income and price elasticity that are very similar to those given by the simpler
import function described above.

 UK imports have grown more quickly than UK demand (the high income
elasticity).
UK exports have grown more slowly than world trade (the low income
elasticity).
Britain’s balance of payments problems , has been the high level of imports .
the reason for this can be found in the income elasticities contained in the export
and import functions we have just considered.
if the income elasticity of demand for imports is high and the income elasticity of
demand for exports is low, then if the UK grows at the same rate as the rest of the
world imports will grow faster than exports.

 UK exports have grown more quickly than UK output.
It is possible that exports rise more quickly than output simply because of
increasing specialization .
If the trade balance is to remain constant on average a high growth of exports
must lead to a high growth of imports. In this case a high level of import to GDP
may be nothing to be concerned about.

 The evidence also suggests that competitiveness has a significant effect on
both exports and imports, with exports responding more quickly and more
strongly. Given the importance of exports and imports in the UK economy (in
1988 exports were 28 per cent and imports 32 per cent of GDP) together with
significant price elasticities of demand it can be argued that the exchange rate,
which affects competitiveness, is a key variable in regulating the level of
aggregate demand.
25000
Kuwait ( Xport - Import )
X
20000
M
15000
10000
5000
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Tradr Balance
15000
X-m
10000
5000
0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-5000
-10000
1.8
GNP%
Kuwait ( Export - Import )
X
1.6
M
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
GNP%
1.0
X-m
0.5
0.0
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-0.5
X-m
-1.0
-1.5
-2.0
60000
2006
2005
2004
2003
2002
2000
2001
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1986
1987
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
-10000
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
(1.00)
2007
(4.00)
CURRENT ACCOUNT
30000
CURRENT ACCOUNT
(3.00)
Trade Balance
50000
Trade Balance
40000
20000
10000
0
-20000
-30000
-40000
GNP%
3.00
2.00
1.00
-
(2.00)
(5.00)
(6.00)
(7.00)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
CURRENT ACCOUNT
CAPITAL ACCOUNT
FINANCIAL ACCOUNT
NET ERRORS AND OMISSIONS
OVERALL BALANCE
60000
CURRENT ACCOUNT
CAPITAL ACCOUNT
FINANCIAL ACCOUNT
NET ERRORS AND OMISSIONS
OVERALL BALANCE
40000
20000
0
-20000
-40000
-60000
10.00
GNP%
8.00
6.00
4.00
2.00
-
(2.00)
(4.00)
(6.00)
(8.00)
Kuwait Balance of Payment ( 1975 – 2007 )
balance of payments
1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2004
2005
2006
2007
GOODS EXPORTS: F.O.B.
8485 9621 9562 10234 18114 20633 16023 10819 11473 12156 10374 7216 8221 7709 11396 6989 1080 6548 10264 11284 12833 14946 14281 9618 12224 19478 16237 15367 21795 30089 46971 58638 63681
GOODS IMPORTS: F.O.B
2400- 3300- 4735- 4326- 4870- 6756- 6736- 7811- 6889- 6549- 5719- 5265- 4938- 5999- 6410- 3810- 5073- 7237- 6940- 6600- 7254- 7949- 7747- 7714- 6708- 6451- 7047- 8117- 9880- 11663- 14238- 14331- 20625-
SERVICES: CREDIT
521
612
625
702
1183 1225 1392
SERVICES: DEBIT
759- 975- 1406- 1854- 2265- 3067- 2905- 3491- 3620- 3705- 4086- 3861- 4077- 4204- 4119- 3359- 5090- 4590- 4589- 4531- 5360- 5072- 5129- 5546- 5172- 4921- 5355- 5838- 6615- 7586- 8604- 10215- 13082-
TRADE BALANCE
5848 5958 4044 4755 12161 12035 7773
INCOME: CREDIT
1283 1631 1965 2901 3575 5487 8325 6780 5712 5854 5330 8352 6129 7863 9211 8584 6093 5907 4489 4174 6125 6409 7744 7163 6094 7315 5427 3716 3733
6584
9413 14667 15688
INCOME: DEBIT
131- 123- 199- 294-
416-
640-
739-
941
458
754-
868
888
1137 1053 1030 1158 1345 1279
1832 2790 1706 857-
683-
838-
237
665- 613- 545-
992
1494 1242 1415 1382 1492 1760 1766 1561 1823 1664 1648 3144
1337- 2213 1099 8091- 3786-
606-
793- 846-
682-
662-
17
CURRENT TRANSFERS : CREDIT
23-
4723
7931
9636
1569 1601 3417 3165 1877- 1905 9929 5499 3059 8443 14583 28852 42023 39610
663- 1004- 1244- 1229- 1467- 1296- 985-
109
3743
94
54
53
79
98
99
616-
524-
369-
372-
456-
556-
85
53
50
66
88
86
1499- 2751-
113
127
CURRENT TRANSFERS: DEBIT
1069- 537- 1249- 1232- 1288- 1580- 1661- 1521- 1551- 1378- 1573- 1266- 1260- 1319- 1494- 4951- 23798- 1927- 1415- 1590- 1518- 1543- 1586- 1874- 2102- 2041- 2132- 2192- 2446- 2638- 3487- 3733- 5203-
CURRENT ACCOUNT, N.I.E.
5930 6929 4561 6130 14032 15302 13699 4963 5311 6428 4798 5616 4561 4602 9136 3886 26479- 450- 2499 3243 5017 7107 7935 2215 5010 14672 8324 4265 9424 18162 34308 51571 47471
3
CAPITAL ACCOUNT: CREDIT
115
289
716
2236 2950 1707 1463
40-
27-
34-
23-
433
797
882
1573
194-
207-
211- 210-
13-
CAPITAL ACCOUNT, N.I.E.
205-
205-
194-
204-
96-
703
FINANCIAL ACCOUNT, N.I.E.
6648- 8752- 4030- 5148- 9929- 11306- 8300- 3032- 124 7451- 2334- 7505- 5566- 7340- 8323- 413 38766 11067 421
3304
157 7632- 6211- 2920- 5706- 13779- 5478- 5038- 12106- 16836- 31087- 47962- 37285-
NET ERRORS AND OMISSIONS
1032 2070 412 1424- 3737- 2950- 5116-
OVERALL BALANCE
315
247
943
443-
366
1045
283
1975 1002
117
545
810
462 5196- 11012- 8765- 4192- 6292- 5119- 705 1621- 886
83- 1847- 1928- 1275 897- 1276 1851 1478-
50
139-
24-
7
259
32-
1596
205-
4432- 1140 1919- 1806 842-
35-
916
205-
44
18-
824
CAPITAL ACCOUNT: DEBIT
79
20-
474
2217 2931 1672 1431
912
842- 2869- 1869- 574-
918
2268 2908 970- 1824-
1130- 3398-
629
619
907-
8541-
3583
3218
 Exports Function :
Xt = α + β1y*t-1 + β2 θ t-1
X is exports , y* world GDP and θ is the competitiveness measure .
Xt = -106.85 + 50.11 y*t-1 + 0.01 θ t-1
In Log :
Xt = -0.76 + 2,43 y*t-1 + 0.43 θ t-1
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.81427624
R Square
0.663045794
Adjusted R Square
0.636089458
Standard Error
24.76938071
28
Observations
ANOVA
df
SS
MS
F
Regression
2
30181.64794 15090.82397 24.5970292
Residual
25
15338.05551 613.5222206
Total
27
45519.70346
Coefficients Standard Error
Intercept
106.8567776-
t Stat
P-value
Significance F
1.24347E-06
Lower 95%
Upper 95%
Lower 95.0% Upper 95.0%
43.02725006 2.48346751- 0.020073568 195.4730571- 18.24049799- 195.4730571- 18.24049799-
X Variable 1
50.11549588
14.86670744 3.370988236 0.002436492
19.49693901 80.73405274 19.49693901 80.73405274
X Variable 2
0.008570657
0.001222155 7.012742633 2.37575E-07
0.006053582 0.011087731 0.006053582 0.011087731
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.633109776
R Square
0.400827989
Adjusted R Square
0.352894228
Standard Error
0.222933237
28
Observations
ANOVA
df
Regression
SS
2
MS
F
Significance F
0.831182089 0.415591045 8.362122676 0.001657273
Residual
25
1.242480709 0.049699228
Total
27
2.073662799
Coefficients Standard Error
t Stat
P-value
Lower 95%
Upper 95% Lower 95.0% Upper 95.0%
Intercept
0.76234262-
0.667076039 1.142812175- 0.263943259 2.136211429-
0.61152619 2.136211429-
X Variable 1
2.429392953
0.923815162 2.629739209
X Variable 2
0.433106658
0.106410469 4.070150822 0.000413682 0.213950196 0.65226312 0.213950196
0.61152619
0.01441138 0.526760027 4.332025879 0.526760027 4.332025879
0.65226312
 Imports Function :
Mt = α + β1yt-1 - β2 θ t-2
M is imports , y Domestic GDP and θ is the competitiveness measure .
Mt = 23.88 + 0.13 yt-1 – 2.61 θ t-2
With Log :
Mt = 1.48 + 0.09 yt-1 – 0.1 θ t-2
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.323294511
R Square
0.104519341
Adjusted R Square
0.026651458
Standard Error
14.16492344
Observations
26
ANOVA
df
SS
MS
F
Significance F
Regression
2
538.6377064
269.3188532
1.342265085
0.280961244
Residual
23
4614.836289
200.6450561
Total
25
5153.473996
Coefficients
Standard Error t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
32.87902494
26.57052891
1.237424556
0.228414284
22.0863016-
87.84435147
22.0863016-
87.84435147
X Variable 1
2.611426631
8.911393426
0.29304358
0.772116505
15.82319509-
21.04604836
15.82319509-
21.04604836
X Variable 2
0.130982606
0.086015777
1.522774193
0.141447034
0.046954586-
0.308919797
0.046954586-
0.308919797
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.277453491
R Square
0.076980439
Adjusted R Square 0.003282131Standard Error
0.111967308
26
Observations
ANOVA
df
Regression
SS
2
MS
F
Significance
F
0.024048046 0.012024023 0.959107576 0.398038796
Residual
23
0.288343597 0.012536678
Total
25
0.312391643
Coefficients
Standard
Error
1.478339789
0.271653782 5.441999656 1.56887E-05 0.916381129 2.04029845 0.916381129 2.04029845
X Variable 1
0.08529403
0.067884813 1.256452305 0.221564168 0.055136405- 0.225724465 0.055136405- 0.225724465
X Variable 2
0.095068452
0.469675099 0.202413226 0.841373493 0.876528511- 1.066665416 0.876528511- 1.066665416
Intercept
t Stat
P-value
Lower 95%
Upper 95% Lower 95.0% Upper 95.0%
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