Transcript Current account

Chapter 14
Macroeconomics
and International
Trade
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Chapter Outline
14.1 Why and How We Trade
14.2 The Current Account and the Financial
Account
14.3 International Trade, Technology Transfer,
and Economic Growth
EBE Are companies like Nike harming workers in
Vietnam?
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Key Ideas
1.
2.
International trade enables countries to
focus on activities in which they have a
comparative advantage.
The current account includes international
flows from exports, imports, factor
payments, and transfers.
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Key Ideas
3.
4.
If a country runs a current account deficit, it
pays for this by giving its trading partners
financial IOUs. If a country runs a current
account surplus, it receives financial IOUs
from its trading partners.
The world has become more globalized
over the past several decades.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Trade, both within and between countries,
enhances our quality of life by increasing
the efficiency of production.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Trade increases the efficiency of production
through gains from specialization.
By specializing in a single job or activity, each
member of an economy can produce more than if
all members produced every good or service by
themselves.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
A producer has an absolute advantage in
producing a good (or service) if the producer can
produce more units per hour compared to other
producers.
A producer has a comparative advantage in
producing a good (or service) if the producer has
a lower opportunity cost compared to that of
other producers.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Consider the example of LeBron James and Billy
Benchwarmer. Each can produce points in
basketball and hits in baseball.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Points per Season
Hits per Season
LeBron James
Billy Benchwarmer
2,000
60
40
20
Who has an absolute advantage in baseball, and
who has one in basketball?
Who has a comparative advantage in baseball,
and who has one in basketball?
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Points per Season
Hits per Season
LeBron James
Billy Benchwarmer
2,000
60
40
20
LeBron James has an absolute advantage in
both sports since he can produce more points in
basketball and also more hits in baseball than
Billy Benchwarmer.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Points per Season
Hits per Season
LeBron James
Billy Benchwarmer
2,000
60
40
20
Who has a comparative advantage in baseball,
and who has one in basketball?
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
LeBron forgoes 40 hits for 2,000 points, or
40 / 2,000 = 0.002 forgone hits for each point.
Billy forgoes 20 hits for 60 points, or
1 / 3 = 0.33 forgone hits for each point.
LeBron James has a comparative advantage in
basketball since he can produce points at a
lower opportunity cost.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
LeBron forgoes 2,000 points for 40 hits, or
2,000 / 4 = 500 forgone points for each hit.
Billy forgoes 60 points for 20 hits, or
3 / 1 = 3 forgone points for each hit.
Billy Benchwarmer has a comparative
advantage in baseball since he can produce hits
at a lower opportunity cost.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Question: What, then, makes LeBron specialize
in basketball and Billy specialize in baseball?
Answer: Market prices cause LeBron to
specialize in basketball and Billy to specialize
in baseball.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
The value added of one point in the National
Basketball Association (NBA) is $10,000.
The value added of one hit in Major League
Baseball (MLB) is $10,000.
LeBron James
Billy Benchwarmer
Salary in Basketball
$20 mil / year
$0.6 mil / year
Salary in Baseball
$0.4 mil / year
$0.2 mil / year
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
The value added of one point in the NBA is
$10,000.
The value added of one hit in MLB is $20,000.
LeBron James
Billy Benchwarmer
Salary in Basketball
$20 mil / year
$0.6 mil / year
Salary in Baseball
$0.8 mil / year
$0.4 mil / year
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
The value added of one point in the NBA is
$10,000.
The value added of one hit in MLB is $100,000.
LeBron James
Billy Benchwarmer
Salary in Basketball
$20 mil / year
$0.6 mil / year
Salary in Baseball
$4 mil / year
$2 mil / year
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Question: Why does the United States supply
80% of NBA players and fewer than 50% of
professional soccer players in Major League
Soccer (MLS)?
Naïve Answer: The United States has the tallest
people.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Answer: A typical U.S.-born athlete has a
comparative advantage in basketball, while a
typical Dutch-born athlete has a comparative
advantage in soccer.
Points per Season
Goals per Season
U.S. Athlete
Dutch Athlete
500
3
100
2
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
These comparative advantages, combined with a
value added of $20,000 per point and $100,000
per goal, show the salary differences.
U.S. Athlete
Salary in Basketball $1,000,000 / year
Salary in Soccer $300,000 / year
© 2015 Pearson Education, Ltd.
Dutch Athlete
$100,000 / year
$200,000 / year
14.1 Why and How We Trade
Question: Why does the United States supply
90% of Women’s National Basketball
Association (WNBA) players and around 60% of
National Women’s Soccer League (NWSL)
players?
Answer: A typical U.S.-born athlete has a
comparative advantage in basketball and thus is
expected to receive a higher salary in it.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
By exploiting comparative advantage,
international trade increases overall economic
efficiency.
As a result, goods and services are sold at lower
prices, which benefits consumers.
In addition, domestic citizens and firms will
receive payments from patents, distribution,
retail, and production of component parts.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Although trade creates gains for society as a
whole, trade will produce some losers.
In the United States, low-skilled workers suffer
as many of their jobs are lost through trade and
outsourcing.
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
We can measure the openness of an economy to
trade by looking at either of the following:
1. Exports / GDP
2. Imports / GDP
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Exhibit 14.5 U.S. Imports and Exports as a Share of GDP from 1929 to 2013
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Exhibit 14.6 The Ratio of Imports to GDP in Four Large
Economies and in the Total World Economy
© 2015 Pearson Education, Ltd.
14.1 Why and How We Trade
Because international trade creates winners and
losers, most countries, including the United
States, impose trade barriers like tariffs.
In industrialized countries, tariffs are generally
low but can be quite high for agricultural goods.
In some developing countries, tariffs are used to
raise revenue and to protect domestic producers.
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
In 2013, the United States imported $2,756
billion in total, with $456 billion coming from
China.
In 2013, the United States exported $2,280
billion in total, with only $156 billion going to
China.
What does this mean? More importantly, should
we be concerned?
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Net exports or the trade balance is defined as
exports minus imports.
When the trade balance is positive, it is called a
trade surplus.
When the trade balance is negative, it is called a
trade deficit.
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
The international accounting system is built on
the concept of residency:
• Income-based payments from foreigners
• Income-based payments to foreigners
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Income-Based Payments from Foreigners
1. Receiving payments from the sale of goods
and services to foreigners: exports
2. Receiving income from assets that the
domestic resident owns in foreign countries:
factor payments from foreigners
3. Receiving transfers from individuals who
reside abroad or from foreign governments:
transfers from foreigners
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Income-Based Payments to Foreigners
1. Making payments to foreigners in return for
their goods and services: imports
2. Paying income on assets that foreign residents
own in the domestic economy: factor
payments to foreigners
3. Making transfers to individuals who reside
abroad or to foreign governments:
transfers to foreigners
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
For each item, we can sum payments from foreigners (
+ ) and payments to foreigners ( – ):
Net exports = (Payments from abroad for exports) – (Payments
to foreigners for imports)
Net factor payments from abroad = (Factor payments from
abroad) – (Factor payments to foreigners)
Net transfers from abroad = (Transfers from abroad) – (Transfers
to foreigners)
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
The current account is the net flow of payments
made to domestic residents from foreign
residents on goods, services, factor payments,
and transfers:
Current account = (Net exports) + (Net factor
payments from abroad) + (Net transfers from
abroad)
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Trade in goods and services
Factor payments
Transfer Payments
Current account
Payments from
Foreigners
2,280
780
Payments to
Foreigners
2,756
580
Net Payments
–476
200
–124
–400
Financial account
+400
The Current Account and the Financial Account of the United States in
2013 (in Billions of 2013 Dollars)
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Question: What are the consequences of running a
current account deficit?
Idea: When U.S. residents make $379 billion of net
payments to foreigners, the payments are made in
U.S. dollars.
Answer: These dollars enable the foreign residents
to buy U.S. assets, which can be exchanged for U.S.
goods and services at some point in the future.
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
Exhibit 14.8 Circular Flows in the U.S. International Transactions Accounts
© 2015 Pearson Education, Ltd.
14.2 The Current Account and the Financial Account
The financial account is the increase in domestic
assets held by foreigners minus the increase in
foreign assets held domestically.
The financial account is defined so that the net
flows in the financial account offset the net flows
in the current account:
(Current account) + (Financial account) = 0
© 2015 Pearson Education, Ltd.
14.3 International Trade, Technology Transfer, and Economic Growth
International trade can
also benefit countries
through the transfer of
technology from more
advanced to less
advanced economies.
The transfer of technology will increase
productivity and thus the growth rate of GDP.
Let’s consider the example of China.
© 2015 Pearson Education, Ltd.
14.3 International Trade, Technology Transfer, and Economic Growth
Exhibit 14.9 Chinese Imports and Exports as Shares of Chinese GDP
(1970–2012)
© 2015 Pearson Education, Ltd.
14.3 International Trade, Technology Transfer, and Economic Growth
Foreign direct investment refers to investments
by foreign individuals and companies in domestic
firms and businesses.
To qualify as foreign direct investment, this
capital flow must generate a large ownership
stake in a local firm for the foreign investors.
Foreign direct investment is a major conduit for
technology transfer.
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Question: Are
companies like
Nike harming
workers in
Vietnam?
Data: Agricultural and factory wages in
Vietnam, as well as data on trade, growth,
poverty, and child labor-force participation.
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Unskilled workers in the
factories that
manufacture Nike
products earn $4–$5 per
day under poor working
conditions.
Unskilled workers on Vietnamese farms earn $1–$3
per day in similar conditions. Unskilled workers in
the United States earn over $50 per day.
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Exhibit 14.10 The Relationship Between GDP per Capita and Child
Labor (the Fraction of Children Ages 7–14 Who Are Working)
© 2015 Pearson Education, Ltd.
14 Macroeconomics and International Trade
Question: Are companies like Nike harming
workers in Vietnam?
Answer: The Vietnamese workers who make
Nike’s sneakers are paid extremely low wages
and work in unsafe conditions. However, the next
best alternative—to work in the agricultural
sector—appears to be even worse.
© 2015 Pearson Education, Ltd.