Transcript Slide 1

International Economics
Part 1
Dr. Stefan Kooths
BiTS Berlin
(winter term 2013/2014)
www.kooths.de/bits-ie
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1
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Contact data
Dr. Stefan Kooths
Deputy Head of the Forecasting Center
Kiel Institute for the World Economy
Office Berlin
In den Ministergärten 8
10117 Berlin
030/2067-9664
[email protected]
www.kooths.de
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The Kiel Institute for the World Economy
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Outline
1. Introduction and Overview
2. Systemizing and Recording Cross-border Economic Activity
3. The Pure Theory of International Trade
4. Trade Policy: Free Trade vs. Protectionism
5. Foreign Exchange Markets and the Open Macroeconomy
6. Case Study: The Euro Area Crisis
7. Summary: The Key Lessons Learnt
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Outline
1. Introduction and Overview
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Motivation, key questions, and methodology
Course scheme
2. Systemizing and Recording Cross-border Economic Activity
3. The Pure Theory of International Trade
4. Trade Policy: Free Trade vs. Protectionism
5. Foreign Exchange Markets and the Open Macroeconomy
6. Case Study: The Euro Area Crisis
7. Summary: The Key Lessons Learnt
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Cross-border economic activity
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International division of labor
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Causes of Globalization (overview)
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Liberalization of world trade
Liberalization of cross-border capital flows
Collapse of centrally-planned economies
Increased political/social stability
Improved transportation infrastructure
Progress in telecommunication systems/internet technologies
Creation of economic blocs (e.g. EEC/EU, NAFTA, MERCOSUR)
Spread of technological know-how via FDI
Better education for more people
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Effects of Globalization (overview)
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Generally: More choices (deeper markets)
More competition on world markets
Increased number of tradable goods and services
International competition for production sites
(globally integrated value-added chains)
 Accelerated structural change/more innovations
(pressure on domestic labor markets)
 Regulatory competition, pressure on tax and transfer systems
(less latitude for national policies)
 Intensified international dependencies
 Net gains, but domestic winners and losers (preview)
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Why „International Economics“ is different (and why it is not)
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Economics and the nation state
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Microeconomic and macroeconomic foundations
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Methodological individualism
 General method
» Individuals as point of departure for economic analysis
» Explaining social processes via actions of involved persons
 Individuals …
» … are diverse
» … have exogenous preferences
» … are capable of acting on their own
 Subjectivism
» Individual preferences
» No scientific inter-subjective comparisons of utility
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Gains from trade and voluntary contracts
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Pitfalls of collectivist analysis
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Outline
1. Introduction and Overview


Motivation, key questions, and methodology
Course scheme
2. Systemizing and Recording Cross-border Economic Activity
3. The Pure Theory of International Trade
4. Trade Policy: Free Trade vs. Protectionism
5. Foreign Exchange Markets and the Open Macroeconomy
6. Case Study: The Euro Area Crisis
7. Summary: The Key Lessons Learnt
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Literature, CAL software, and website
 Literature
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Brümmerhoff, D. (2007): Volkswirtschaftliche Gesamtrechnungen; 8. Aufl., Oldenbourg Verlag:
München.
Dieckheuer, G. (2001): “Internationale Wirtschaftsbeziehungen”, 5. Aufl., München/Wien.
Eibner, W. (2006): “Understanding International Trade: Theory & Policy/Anwendungsorientierte
Außenwirtschaft: Theorie & Politik”, Oldenbourg Verlag: München/Wien.
Kooths, S. (2000): Gesamtwirtschaftlicher Modellbau mit MAKROMAT; Verlag Vahlen: München.
Kooths, S. (2013a): Wirtschaftspolitik mit Weitwinkel; in: Frankfurter Allgemeine Zeitung, 1. Februar
2013, S. 12 („Ordnung der Wirtschaft“).
Kooths, S. and B. van Roye (2012): “Euro Area: Single Currency – National Money Creation”, Kiel
Working Papers, No. 1787, Kiel.
Pugel, T, A. (2012): “International Economics”, 15th Edition, McGraw-Hill: New York.
Snower, D., J. Boysen-Hogrefe, K.-J. Gern, H. Klodt, S. Kooths, C.-F. Laaser, C. Reicher, B. van Roye, J.
Scheide and K. Schrader (2013): “The Kiel Policy Package to Address the Crisis in the Euro Area”, Kiel
Policy Brief, No. 58a, Kiel.
 Computer-Assisted Learning software (optional)
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ACTAS (www.kooths.de/actas)
MAKROMAT (www.makromat.de)
 Course Website: www.kooths-de/bits-ie
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Outline
1. Introduction and Overview
2. Systemizing and Recording Cross-border Economic Activity
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The Balance of Payments (BoP)
The International Investment Position (IIP)
3. The Pure Theory of International Trade
4. Trade Policy: Free Trade vs. Protectionism
5. Foreign Exchange Markets and the Open Macroeconomy
6. Case Study: The Euro Area Crisis
7. Summary: The Key Lessons Learnt
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Types of cross-border transactions
 Trade flows
» Goods (merchandise)
» Services
 Cross-border incomes
(compensation for use of production factors)
» Labor: Compensation of employees
» Capital: Investment income
 Transfers
» Current transfers (regularly)
» Capital transfers (one-off)
 Financial transactions
» Nonofficial: Direct investment | Portfolio investment | Other investment
» Central bank: Changes in official international reserves
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Accounting principles:
Credit and debit items (double-entry bookkeeping)
 Credit item
(measured with a positive sign/entry on the left side) …
» … results from a transaction for which the country must be paid. It
sets up the basis for a payment by a foreigner into the country – that
is, it creates a monetary claim on a foreigner.
 Debit item
(measures with a negative sign/entry on the right side) …
» … results from a transaction for with the country must pay. It sets up
the basis for a payment by the country to a foreigner – that is, it
creates a monetary liability against a foreigner.
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Valuation: cif vs. fob
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People in the BoP: Residents vs. nationals
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Timing: Accrual principle
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The consolidated BoP account
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BoP sections I: Current vs. financial account
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BoP sections II: The detailed BoP structure (IMF BoP Manual)
 IMF Balance of Payments Manual
http://www.imf.org/external/pubs/ft/bopman/bopman.pdf
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Official reserve assets and the role of the central bank
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Real-life BoPs
Statistical Discrepancies
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Net Errors and Omissions
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Balance on Unclassified Transactions
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Interpreting BoP balances (BoP and National Accounts)
 Goods and services balance / trade balance (NX)
» Net exports of both goods and services
 Current account balance (CA)
» Net credits on the flows of goods, services, income, current transfers
 Financial account balance (FA)
» Net credits involving changes in nonofficial foreign financial assets and
liabilities
 Overall balance / official settlements balance (B)
» Current account balance + (nonofficial) financial account balance [+
statistical discrepancy] = ‒ Increase of official reserve assets
 Link to National Accounts
» NX and GDP
» CA and GNI
» CA + net capital transfers and Net external lending
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Accounting exercise (Reporting country: USA)
(1) At the end of the year, Northern Illinois (a U.S. utility company) buys $34 million in natural
gas from a Canadian firm. It does not pay in cash immediately, but instead issues a
promissory note saying it will pay the bill (plus interest that will accrue over time) one year
later.
(2) Brazilian soccer fans spend $6 million as tourists in the U. S. during a soccer tournament, and
they pay for their hotels, meals, and transportation by using the deposits that they have at a
New York bank.
(3) The U.S. Treasury pays $25 million in interest on its past borrowing from Swiss investors,
paying with checks on a New York bank.
(4) The U.S. monetary authority (Fed) in its official role becomes concerned that the exchange
rate value of the dollar may appreciate against the Japanese yen. It decides to purchase yendenominated bank deposits from a major Tokyo bank and pay by transferring $15 million of
its New York bank deposits to this Tokyo bank.
(5) The U.S. government gives $8 million in foreign aid to the government of Egypt in the form of
wheat from U.S. government stockpiles.
(6) Mexican immigrant workers in the U.S. send $2 million from their bank accounts at a
Phoenix-based bank as remittances to their families in Mexico.
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Outline
1. Introduction and Overview
2. Systemizing and Recording Cross-border Economic Activity


The Balance of Payments (BoP)
The International Investment Position (IIP)
3. The Pure Theory of International Trade
4. Trade Policy: Free Trade vs. Protectionism
5. Foreign Exchange Markets and the Open Macroeconomy
6. Case Study: The Euro Area Crisis
7. Summary: The Key Lessons Learnt
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Stocks vs. flows
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Linking BoP and IIP
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Transaction-based flows vs. revaluations of stocks
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Germany: Current account, capital transfers, and IIP
2000
1800
Bn. Euro
Bn. Euro
Balance on Current Account (rhs)
Net Errors and Omissions (rhs)
IIP
Transaction-based IIP (1992 ff.)
200
Net Capital Transfers
1600
150
1400
1200
100
1000
800
50
600
400
0
200
0
-50
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Annual data.
Source: Deutsche Bundesbank, IfW calculations.
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