KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 1
International EconomicsPart 1
Dr. Stefan KoothsBiTS Berlin
(winter term 2013/2014)www.kooths.de/bits-ie
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 2
Contact data
Dr. Stefan KoothsDeputy Head of the Forecasting CenterKiel Institute for the World Economy
Office BerlinIn den Ministergärten 810117 Berlin030/2067-9664
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 3
The Kiel Institute for the World Economy
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 4
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 5
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 6
Cross-border economic activity
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 7
International division of labor
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 8
Causes of Globalization (overview)
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 9
Effects of Globalization (overview)
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)
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 10
Why „International Economics“ is different (and why it is not)
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 11
Economics and the nation state
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 12
Microeconomic and macroeconomic foundations
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 13
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 14
Gains from trade and voluntary contracts
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 15
Pitfalls of collectivist analysis
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 16
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 17
Literature, CAL software, and website
Literature» 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)» ACTAS (www.kooths.de/actas)» MAKROMAT (www.makromat.de)
Course Website: www.kooths-de/bits-ie
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 18
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 19
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 20
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.
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 22
People in the BoP: Residents vs. nationals
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 24
The consolidated BoP account
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 25
BoP sections I: Current vs. financial account
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 26
BoP sections II: The detailed BoP structure (IMF BoP Manual)
IMF Balance of Payments Manualhttp://www.imf.org/external/pubs/ft/bopman/bopman.pdf
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 27
Official reserve assets and the role of the central bank
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 28
Real-life BoPs
Statistical Discrepancies=Net Errors and Omissions=Balance on Unclassified Transactions
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 29
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 30
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 yen-denominated 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.
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 31
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
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 34
Transaction-based flows vs. revaluations of stocks
KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 35
Germany: Current account, capital transfers, and IIP
-50
0
50
100
150
200
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Balance on Current Account (rhs) Net Errors and Omissions (rhs) Net Capital Transfers
IIP Transaction-based IIP (1992 ff.)
Annual data.Source: Deutsche Bundesbank, IfW calculations.
Bn. Euro Bn. Euro