Econ 1202 1st Edition Lecture 25 Outline of Lecture 24 (Globalization and Tariffs)I. First Stop: David RicardoII. Law of Comparative Advantage and the Corn LawsIII. Rise of Free TradeIV. Real World Trade: Not Complete SpecializationV. What Causes a Nation to Have the Comparative Advantage?VI. External Economics: Economics of ClusteringVII. World Without TradeVIII. World With TradeIX. Formal TermsX. Direction of TradeXI. Winners and Losers From Trade: Export SideXII. Winners and Losers From Trade: Import SideXIII. What’s All the Fuss Then?XIV. Impact of TariffsXV. The Effects of a TariffOutline of Lecture 25 (The International Economy)I. LinkagesII. Flow of Goods: TermsIII. The Internationalization of the U.S. EconomyIV. Factors that Might Influence a Country’s Exports, Imports, and Net ExportsV. Flow of Financial Assets: TermsVI. Variables that Influences Net Capital FlowVII. Balance of PaymentsVIII. Composition of Balance of PaymentsIX. Current AccountX. Financial AccountsXI. Capital AccountXII. Relationship Between Goods and AssetsXIII. Net Export DeficitXIV. Net Export SurplusXV. The Case of the U.S.XVI. Exchange RatesXVII. Exchange Rates: Basic TermsXVIII. Demand and Supply for the U.S. DollarXIX. Two Versions of the Exchange Rate are Reciprocals of Each OtherThe International EconomyI. Linkagesa. Linkages between countries at the macroeconomic level:i. Trade in goods and servicesii. Flows of financial investmentb. Open Economy- a country that has interactions in trade or finance with other countriesc. Closed Economy-has no interactions in trade or finance with other countriesi. No economy is completely closedii. Closest closed economy would be North KoreaII. Flow of Goods: Termsa. Trade Balance (Net Exports)-the value of a nation’s exports minus the value of its importsb. Trade Surplus (Positive Net Exports)-exports are greater than imports; thecountry sells more goods and services abroad than it buys from other countriesc. Trade Deficit (Negative Net Exports)-imports are greater than exports; thecountry sells fewer goods and services abroad than it buys from other countriesIII. The Internationalization of the U.S. Economya. Increasing importance of international trade and financei. 1950s-imports and exports are 4-5% of GDPii. Today-about 3x that percentageb. Largest trading partner (2012 with imports and exports combined)i. Canada followed by China, Mexico, Japan, Germany, and the UKIV. Factors that Might Influence a Country’s Exports, Imports, and Net Exportsa. Tastes of consumers for domestic and foreign goodsb. Prices of goods at home and abroadc. Incomes of consumers at home and abroadd. Cost of transporting goods from country to countrye. Government policies toward international tradef. Exchange rates at which people can use domestic currency to buy foreign currenciesV. Flow of Financial Assets: Termsa. Net Capital Flow-purchase of domestic assets by foreigners (inflow) minusthe purchase of foreign assets by domestic residents (outflow)i. Foreign direct investmentii. Foreign portfolio investmentb. Net Foreign Investment-capital outflow minus capital inflow VI. Variables that Influences Net Capital Flowa. Real interest rates paid on foreign assetsb. Real interest rates paid on domestic assetsc. Perceived economic and political risks of holding assets abroadd. Government policies that affect foreign ownership of domestic assetsVII. Balance of Paymentsa. The way we typically categorize these economic interactions with other countries is by examining the country’s balance of paymentsb. Balance of Payments-the record of a country’s trade with other countries in goods, services, and assetsVIII. Composition of Balance of Paymentsa. Current Account-the record of the country’s net exports, net income on investments, and net transfers (short-term flows)b. Financial Account-the record of the purchases of assets a country has made abroad and foreign purchases of assets in the country (long-term flows)c. Capital Account-the record of relatively minor transactions such as migrants’ transfers and sales and purchases of non-produced, non-financial assets (generally ignored)IX. Current Accounta. The current account records a country’s net exports, net income on investments, and net transfersi. These reflect a nation’s short-term flowsb. Most important part: the balance of trade, the difference between the value of the goods a country exports, and the value of goods a country importsc. The balance of services is the different between the values of the exports and imports of servicesd. Net exports is the sum of the balance of trade and the balance of servicesX. Financial Accountsa. Financial accounts record a nation’s long to capital flowsi. Capital Outflows-purchases of assets overseas by Americansii. Capital Inflows-purchases of American assets by foreigners1. Follow the moneyb. The assets may be financial assets like stocks and bonds, which is referredto as foreign portfolio investment or physical assets like factories, which isreferred to as foreign direct investmentc. The balance on the financial account reflects the measure of net capital flowsd. Also, net foreign investment, which measures the difference between capital outflows from a country and capital inflowsXI. Capital Accounta. Generally ignored: the capital account refers only to relatively minor transactions like migrants’ transfers or sales and purchases of non-produced, non-financial assets like intellectual property or natural resource rightsXII. Relationship Between Goods and Assetsa. Net Exports (NX)i. Imbalance between a country’s exports and its importsb. Net Foreign Investment (NFI)i. Amount of foreign assets bought by domestic residents and the amount of domestic assets bought by foreignersc. NFI=NXXIII. Net Export Deficita. When NX<0 (trade/service deficit)i. Buying more goods and services from foreigners than foreigners are selling to themii. The net purchase of goods and services needs to be financed1. How?a. Selling assets abroad (debt)i. Capital is flowing into the country (FDI>0)XIV. Net Export Surplusa. When NX>0 (trade/service surplus)i. Selling more goods and services than foreigners are buying from the countryii. From the net sale of goods and services the country receives foreign currencyiii. Buy foreign assets (lending)1. Capital is flowing out of the country (FDI<0)XV. The Case of the U.S.a. The U.S.i. “The world’s largest debtor”ii. Borrowing