copyright © 2008 pearson addison-wesley. all rights reserved. chapter 13 international trade in...
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Copyright © 2008 Pearson Addison-Wesley. All rights reserved.
Chapter 13
International Trade in Goods and Assets
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Chapter 13 Topics
• A two-good model of a small open economy.
• The benefits from trade, and the macroeconomic effects of a change in the terms of trade.
• A two-period small open economy model: the current account.
• Production, investment, and the current account.
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A two-good model of a small open economy
• Production possibilities frontier.
• Indifference curves of the representative consumer.
• Illustrate equilibrium when there is not trade, and when the SOE is a price-taker on world markets.
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Figure 13.1 Production Possibilities Frontier for the SOE
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Figure 13.2 Indifference Curves of the Representative Consumer in the SOE
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Equation 13.1
In equilibrium the consumer maximizes when his or her marginal rate of substitution equals the relative price of the two goods.
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Equation 13.2
Optimal behavior by firms implies that the marginal rate of transformation is equal to the relative price of the two goods in equilibrium.
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Figure 13.3 Equilibrium in the SOE with No Trade
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Equation 13.3
Representative consumer’s budget constraint when there is trade with the rest of the world:
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Figure 13.4 Production and Consumption in the SOE with Trade
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The Effects of Trade
Welfare must increase for the SOE when trade opens up, no matter which good the SOE initially imports.
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Figure 13.5 An Increase in Welfare When Good a Is Imported
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Figure 13.6 An Increase in Welfare When Good b Is Imported
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An Increase in the terms of trade
• Effects depend on which good is initially imported.
• Income and substitution effects are an important element in analyzing the implications of a change in the terms of trade.
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Figure 13.7 An Increase in the Terms of Trade when Good a Is Initially Imported
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Figure 13.8 An Increase in the Terms of Trade when Good b Is Initially Imported
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A Two-Period Small Open Economy Model
• Two periods – current period and future period.
• Representative consumer with exogenous current-period and future-period incomes.
• The SOE is a price-taker on world credit markets – the real interest rate is exogenous.
• The current account surplus here is equal to savings in the SOE, as there is no investment.
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Equation 13.4
The representative consumer’s lifetime budget constraint:
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Equation 13.5
The government’s intertemporal budget constraint:
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Figure 13.9 The Two-Period Small Open-Economy Model
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Figure 13.10 Deviations from Trend in the Current Account Surplus and GDP
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Figure 13.11 Government Spending and Taxes
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Figure 13.12 The Twin Deficits?
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A Small Open Economy Model with Production and Investment
• Works the same as the real intertemporal model, except the real interest rate is determined on world credit markets, and given to the SOE.
• Current account surplus always adjusts so that the aggregate supply and aggregate demand curves intersect at the world real interest rate.
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Figure 13.13 A Small Open-Economy Model with Production and Investment
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Figure 13.14 An Increase in the World Real Interest Rate
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Figure 13.15 A Temporary Increase in Government Spending
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Figure 13.16 A Permanent Increase in Government Spending
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Figure 13.17 An Increase in Current Total Factor Productivity
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Figure 13.18 An Increase in Future Total Factor Productivity
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Figure 13.19 Investment as a Percentage of GDP
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Figure 13.20 An Increase in the Capital Stock