Chapter_28

Chapter_28 - Chapter 28 International Trade and Capital...

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Chapter 28 International Trade and Capital Flows
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International Trade Trade is important even to a large economy such as the US Exports 12% of GDP Imports 17% Trade and capital flows are easily politicized Free trade can be seen to cost US jobs Foreign control of "essential" assets such as ports or telecommunications infrastructure
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Trade Balance Trade balance is another name for net exports (NX) Value of a country's exports minus the value of its imports trade surplus : a positive trade balance Exports > imports trade deficit : a negative trade balance Imports > exports
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US Trade Balance, 1960 - 2007
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Capital Flows International capital flows : transactions of real estate and financial assets across international borders Capital inflows : purchases of domestic assets by foreign households and firms Capital outflows : purchases of foreign assets by domestic households and firms Net capital inflows (KI) are capital inflows minus capital outflows Capital flows are not counted as imports or exports since the funds are used to purchase assets Imports and exports are goods and services produced in the current year
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Trade Balance (NX) and Net Capital Inflows (KI) NX + KI = 0 US resident purchases Japanese car for $20,000 Imports = $20,000 Manufacturer holds $20,000 in a US bank account Option 1: purchase $20,000 of US goods and services exports = $20,000 NX = 0, KI = 0 NX + KI = 0 Option 2: purchase US bonds or US real estate NX = – $20,000, KI = $20,000 NX + KI = 0 Option 3: sell dollars for yen Follow the dollars and see what the purchaser does with them to determine NX and KI
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A country with a trade imbalance must have a compensating capital flow US has had a trade deficit since late 1970s Capital flows into US 25% of US Treasury debt is owned by foreigners, up from 13% in 1993 Foreign investment in US businesses, real estate, and other assets increased. Policies that reduce trade in goods and services
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This note was uploaded on 04/28/2011 for the course ECON 1 taught by Professor Tang during the Spring '08 term at UCSD.

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Chapter_28 - Chapter 28 International Trade and Capital...

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