cowenecon3e_lectureslides_macro_20_econ_ch38

cowenecon3e_lectureslides_macro_20_econ_ch38 - Some Last...

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MODERN PRINCIPLES OF ECONOMICS Third Edition Some Last Bits and Pieces
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Introduction Three principles: 1. Gains from trade occur when people trade across different countries with different currencies. Just as gains from trade occur within a single nation with a single currency. 2. The rate of savings is a key variable in understanding international trade and finance. 3. Market equilibrium means that, at the margin, the gains from holding or spending one currency are equal to the gains from holding or spending some other currency. 2
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Definition Trade deficit : occurs when the value of a country’s imports exceeds the value of its exports. 3 Trade surplus : occurs when the value of a country’s exports exceeds the value of its imports.
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US Trade Deficit In 2013, the US exported $122 billion worth of goods to China, and imported $440 billion, in goods, from China. The difference is called the U.S. trade deficit with China i.e. -$318. 4
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US Trade Deficit A trade deficit with one country is not a concern. It is different if a country runs a trade deficit with the world as a whole. For every flow of goods there is a corresponding flow of money or financial claims. When other countries sells the US goods, it is paid for in US dollars. 5
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Definition Balance of payments : a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world. 6
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Balance of Payments When there is no borrowing, a person’s trade deficits (purchases) must be matched with other trade surpluses (income). If you take out a loan, you are spending but not earning (“exporting”) equivalent goods and services. You will need to repay the loan at some point, but meanwhile you are running a trade deficit. Your trade deficit is balanced with a loan, which we call a capital inflow or capital surplus . 7
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Balance of Payments When you add up your trade deficit and the capital surplus, the balance of payments nets out to zero. In the long run, you must use your surplus earnings to pay back the loan and the trade deficit will disappear. Paying back the loan limits your future consumption. 8
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Definition Capital surplus : A country runs a capital surplus when the inflow of foreign capital is greater than the outflow of domestic capital to other nations. 9
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Balance of Payments You can finance a trade deficit with: Current income (a job). A loan. Selling assets from previous transactions. Drawing on reserves of cash (savings) from previous periods. 10
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Balance of Payments If earnings are less than spending, you are running a trade deficit: The international balance of payments presents a comparable expression: 11 reserves cash assets debt Spending - Earning reserves official in Change account Capital (-) account Current
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Self-Check 12 If your earnings are greater than your spending, you are running a: a. Trade deficit.
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