Bài giảng International Economics - Chapter 2: International Economics and the Global Economy

International Economics and the Global Economy The international trading system...has enhanced competition and nurtured what Joseph Schumpeter a number of decades ago called “creative destruction,” the continuous scrapping of old technologies to make way for the new. (Alan Greenspan, 2001)The Goals of This ChapterReview the simple circular flow diagram of a closed economy.Illustrate how the closed economy circular flow diagram can be extended into an open economy circular flow diagram and all of its linkages with the rest of the world.Explain the balance of payments accounts, which reflect the logic of the open economy circular flow diagram.Introduce foreign exchange markets and explain how foreign exchange rates are determined by the supply and demand for currencies, which are fundamentally related to the flows recorded in the balance of payments.Present the recent changes in the U.S. balance of payments.Explain the net investment position of a country and how it is related to the balance of payments.The Circular Flow of an EconomyAn economy is a complex organism whose many elements engage in a variety of economic transactions.The circular flow diagram provides a simplified picture of all these economic transactions.A simplest version of an economy consists of households and producers.A more complete circular flow diagram adds a financial sector and a government.Note that the circular flow shows the directions of the flows of payments, not the direction of the flows of the goods or services paid for.The Basic Circular Flow of an EconomyIndividualsProducersC FPAdding Investment Goods (Capital Goods)IndividualsProducersC FPIAdding Intermediate Goods Supplied Among ProducersIndividualsProducersC FPIGIAdding Transfers among IndividualsIndividualsProducersC FPIGITrAdding the Government to the EconomyIndividualsProducersC FPIGITrGovernmentTXITRIGTXPTRPAdding the Financial Sector fo the EconomyIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGThe Closed EconomyIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderOpening the Closed EconomyThe closed economy circular flow diagram can be “opened” up. By adding a foreign economy to the circular flow diagram, a country’s foreign transactions can be illustratedIn an open economy, all four sectors of the domestic economy transact with foreignersWhat Links Could a Single Economy Form with the Rest of the World?IndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadThe Economy Could Import Consumption GoodsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMIt Could Import Intermediate GoodsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMAnd Capital GoodsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMFinally, the Government Could Import GoodsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMThe Open Economy Also Exports Consumption Goods,IndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XIntermediate Goods,IndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XInvestment (Capital) Goods,IndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XAnd Government GoodsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XThere Are International Transfers by IndividualsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XTrFAnd by GovernmentsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XTransfers TrFTrFThere Are Also International Asset Sales and Purchases,IndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XSFSFTransfers TrFTrFAnd the Returns to Foreign-Owned AssetsIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XSFrFFinancial Flows SF, rFSFTransfers TrFrFTrFFigure 2.7The Complete Set of International Links for an Open EconomyIndividualsProducersC FPIGITrSprprISIFinancial SectorGovernmentTXITRIGTXPTRPrGSGBorderAbroadImports IMExports XSFrFFinancial Flows SF, rFSFTransfers TrFrFTrFA Country’s International TransactionsAn open economy exports goods and services, X.It also imports goods and services, IM.It sends savings abroad and receives an inflow of foreign savings; the net inflow is SF.Past inflows and outflows of savings generate a net inflow of returns on assets, rF.There is also a net inflow of international transfers, TrF.Outsourcing, Vertical Specialization, and International TradeOutsourcing explains a large part of the international trade in intermediate goods.Increasingly, international outsourcing is driven by vertical specialization.Vertical specialization occurs when producers in one country import foreign materials, parts, components, etc., in order to produce goods that may then be exported to yet another country. The Logic of the Balance of PaymentsThe open-economy circular flow diagram shows that the net flows of payments for goods and services, asset purchases, returns on accumulated foreign assets, and transfers across a country’s border must sum to zero: (X-IM) + SF + rF + TrF = 0This logical conclusion lies behind the balance of payments accounting.In the balance of payments, the sum total of outflows of payments across the border for products, assets, and transfers equals the sum total of payment inflows from abroad.The Logic of the Balance of PaymentsThe current account contains all transactions related to the trade of goods and servicesThe current account also contains payments to factors of production and earnings on assetsFinally, the current account contains transfers between people and organizations in different countriesIn terms of the notation used earlier, the current account balance = (X!IM) + TrF + rFThe Logic of the Balance of PaymentsThe financial account contains all payments related to the sale and purchase of assets. In terms of the notation above, the financial account balance = SFSince foreign payments must be exactly offset by foreign receipts, the current account and the financial account must sum to zeroThat is, (X!IM) + TrF + rF = !SF How Long Can the U.S. Continue to Run Large Current Account Deficits?For the past 20 years, the U.S. has imported more products than it has exportedAs a country, it has paid for those extra imports by selling assets to foreignersThat is, it has covered the deficit on the current account with a surplus on the financial accountHow much longer will foreigners be willing to accumulate large amounts of U.S. assets?The Net International Investment PositionThe International Investment Position is the net sum of the value of (1) foreign assets that are owned by a country’s own citizens, firms, and government agencies and (2) domestic assets that are owned by foreign citizens, firms, and governments. The balance of payments measures flows of payments over the course of a year, the net investment position measures the accumulated stocks of assets at a point in time. The U.S.’s recent financial account surpluses are reflected in its large negative net international investment position.Table 2-2 The International Investment Position of the United States(US$ billions, current cost basis) U.S.-owned Foreign-owned U.S. Net International assets abroad assets in U.S. Investment Position1988 2,008.4 1,997.9 10.51989 2,350.2 2,397.2 !47.01990 2,294.1 2,458.6 !164.51991 2,470.6 2,731.5 !260.81992 2,466.5 2,918.8 452.31993 3,081.4 3,235.7 !144.3 1994 3,326.7 3,450.4 !123.71995 3,930.3 4,273.6 !343.31996 4,631.3 5,017.8 !386.51997 5,379.1 6,214.3 !835.21998 6,174.5 7,268.6 -1,094.21999 7,386.9 8,440.5 !1,053.62000 7,350.9 8,934.0 !1,583.22001 6,862.9 9,172.1 !2,309.1Source: Table 2 in Elena L. Nguyen (2002), “The International Investment Position of the United States at Yearend 2001,” Survey of Current Business, July, 2002, pp. 18-19.The Foreign Exchange MarketThe foreign exchange market is the set of markets where the world’s many different national currencies are exchanged.It is operated by large private international banking firms.The foreign exchange market can be represented by the familiar supply and demand curves.The foreign exchange rate is determined by the forces of supply and demand.In equilibrium, the supply of a currency equals the quantity demanded.Note the similarity between the balance of payments’ net zero sum of international payments and the foreign exchange market’s equilibrium where the supply and demand of a currency is equal.An Example: The Market for Mexican PesosThe demand curve intersects the supply curve at the price $.10.That is, one peso costs ten U.S. cents.We often use the letter e to represent the foreign exchange rate, so that the equilibrium can be written as e = $.10.An Example: An Increase in Demand for PesosIf holders of dollars want to engage in more foreign transactions that require Mexican pesos, the demand for pesos will increase.Such an increase in demand for pesos will cause the dollar to depreciate and the exchange rate e to rise, all other things equal.In the example shown, e rises from $.10 to $.125.The Foreign Exchange Market: The Mexican PerspectiveThe supply curve for dollars from the U.S. perspective is seen as the demand curve for pesos from MexicoSimilarly, the U.S. demand curve for dollars is the supply curve of pesosThus the equilibrium exchange rate from the Mexican perspective is 1/e = 1/.10 = 10 pesos. The Foreign Exchange Market: A Shift in the Supply of PesosThe shift in demand for dollars from the U.S. perspective is a shift in supply of pesos from the Mexican perspectiveThe shift in supply causes the exchange rate to decline from 10 pesos, or 1/e = 1/$.10, to 1/e = 1/$.125 = 8 pesos37.5 million dollars are exchanged for 300 million (8x37.5) pesos