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Class8 Class8 Presentation Transcript

  • Economics for Journalists Week 8: Trade Jeffrey TimmermansMonday, 25 March, 13
  • Absolute advantage “The producer that requires a smaller quantity of inputs to produce a good is said to have an absolute advantage in producing that good.” – N. Gregory Mankiw, Principles of EconomicsMonday, 25 March, 13
  • Comparative advantage “The producer who gives up less of other goods to produce [a particular good] has the smaller opportunity cost of producing [that particular good] and is said to have a comparative advantage in producing it.” – N. Gregory Mankiw, Principles of EconomicsMonday, 25 March, 13
  • What do these countries have in common? ✤ China ✤ India ✤ Morocco ✤ Turkey ✤ Sri Lanka ✤ Bangladesh ✤ Colombia ✤ Cambodia ✤ Lesotho ✤ MexicoMonday, 25 March, 13
  • And the answer is.... ✤ All ten countries supply clothing to U.S. discount clothing retailer Old Navy ✤ Old Navy sources its products from around 50 countries Photo: Boone NC Magazine ✤ Men’s T-shirt for US$3.99 ✤ Old Navy sold US$1.51 billion in merchandise in 3Q 2012 Sources: Gap Inc. 10-Q filing, Old Navy Web siteMonday, 25 March, 13
  • Volume of monthly exports, 1998-2009 Source: WTO secretariatMonday, 25 March, 13
  • Effects of trade on an exporting country Domestic Price of Supply Textiles Exports Price after Trade Price before Trade Consumer Surplus { World Price Domestic Demand Quantity of TextilesMonday, 25 March, 13
  • Effects of trade on an importing country Domestic Price of Supply Textiles Consumer Consumer Surplus Surplus Price before Trade World Price after Trade { Imports Price Domestic Demand Quantity of TextilesMonday, 25 March, 13
  • Free trade: winners ✤ Domestic consumers in importing countries ✤ Domestic producers in exporting countriesMonday, 25 March, 13
  • Free trade: losers ✤ Domestic consumers in exporting countries ✤ Domestic producers in importing countriesMonday, 25 March, 13
  • Other benefits of trade ✤ Overall economic well-being increases ✤ But not for everyone ✤ Variety of available goods increases ✤ Increased competition ✤ Enhanced flow of ideasMonday, 25 March, 13
  • Arguments against trade ✤ Eliminates jobs ✤ Endangers national security ✤ Harms developing industries ✤ Unfair competition (dumping)Monday, 25 March, 13
  • Government trade policies ✤ Trade barriers ✤ Trade subsidies ✤ Free-trade agreements (to lower barriers & subsidies) ✤ Global (e.g. World Trade Organization negotiations) ✤ Multi-lateral (e.g. North American Free Trade Agreement, Trans- Pacific Partnership)Monday, 25 March, 13
  • Trade barriers: the obvious ones ✤ Tariffs ✤ Licenses ✤ Quotas ✤ Subsidies ✤ Content requirements ✤ EmbargoMonday, 25 March, 13
  • Effects of a tariff Domestic Price of Supply Textiles Consumer Surplus Consumer Price without Surplus Trade Price after Tariff { Tariff World Price } Producer Imports Surplus Domestic Imports Demand Producer Quantity of Surplus TextilesMonday, 25 March, 13
  • Trade subsidies ✤ The U.S. paid domestic farmers $245.2 billion in subsidies from 1995-2009, including $15.4 billion in 2009 ✤ 10% of farmers received 74% of subsidies ✤ Corn subsidies totaled $73.8 billion (1995-2009) ✤ The E.U.’s Common Agricultural Policy costs €55 billion per year, or around 40% of the total E.U. budget Sources: Environmental Working Group, European UnionMonday, 25 March, 13
  • Trade barriers: the less obvious ✤ “Quality” requirements ✤ Health concerns ✤ Packaging ✤ Labeling ✤ Other product standards ✤ Dense bureaucracyMonday, 25 March, 13
  • “Buy American” Source: CNN CNN’s Lou Dobbs on “Buy American”Monday, 25 March, 13
  • Trade terminology ✤ Trade surplus = exports > imports ✤ Trade deficit = imports > exports ✤ Deficits and surpluses “widen” or “narrow” as they move farther from or closer to zeroMonday, 25 March, 13
  • Trade: a zero-sum game ✤ One country’s trade surplus is another country’s trade deficit ✤ If China exports a T-shirt to the U.S., the value of that T-shirt is counted as a credit (addition) to China’s trade balance and as a debit (subtraction) to the U.S. trade balanceMonday, 25 March, 13
  • Writing about trade China trade surplus narrows, but exports rising March 07, 2013|Aaron Back BEIJING (MarketWatch) — China’s trade surplus narrowed in February, but exports performed far better than expected — a positive signal for both China and the world economy. However, economists say that Chinese data in January and February are usually volatile due to the Lunar New Year holiday, and often warn against reading too much into strong trade figures for these months. China’s February trade surplus declined to $15.25 billion from $29.15 billion in January, according to figures released Friday, but economists polled earlier had expected a $16.0 billion deficit. Though China has a large trade surplus with the outside world, it is common for the country to run deficits in the early part of the year, partly because factories close and workers return home for the Lunar New Year. Source: MarketWatchMonday, 25 March, 13
  • Trade & Currencies ✤ Trade surpluses tend to lead to stronger currencies ✤ Trade deficits tend to lead to weaker currenciesMonday, 25 March, 13
  • Balance of Payments ✤ While GDP reports a country’s output of goods & services, a Balance of Payments (BOP) statement records a country’s cross-border transactions, both current account transactions (including trade in goods & services) and capital transactions ✤ The two sides of a BOP statement must always balance ✤ A deficit in the current account must be matched by an equivalent surplus in the capital account ✤ In other words, a country that runs a $1 billion current account deficit must finance it by attracting $1 billion in capitalMonday, 25 March, 13
  • Structure of a BOP statement ✤ Current Account ✤ Balance on trade in goods (Exports - Imports) ✤ Balance on trade in services ✤ Net income & net unilateral transfers ✤ Capital & Financial Account ✤ Errors & OmissionsMonday, 25 March, 13
  • BOP: Current Account ✤ Debits (subtractions) ✤ Credits (additions) ✤ Imports ✤ Exports ✤ Income payments ✤ Income receipts ✤ Increase in reserves ✤ Decrease in reserves ✤ All are uses of foreign ✤ All are sources of foreign exchange exchangeMonday, 25 March, 13
  • Bureau of Economic Analysis U.S. International Transactions Accounts Data Table Creation Date: December 15, 2009 Release Date: December 16, 2009 Table 1. U.S. International Transactions [Millions of dollars] (Credits +; debits -)/1/ 2008 2008 Current account Exports of goods and services and income receipts 2591233 Imports of goods and services and income payments -3168938 Exports of goods and services 1826596 Imports of goods and services -2522532 Goods, balance of payments basis/2/ 1276994 Goods, balance of payments basis/2/ -2117245 Services/3/ 549602 Services/3/ -405287 Transfers under U.S. military agency sales contracts/4/ 22571 Direct defense expenditures -36452 Travel 110090 Travel -79743 Passenger fares 31623 Passenger fares -32597 Other transportation 58945 Other transportation -72143 Royalties and license fees/5/ 91599 Royalties and license fees/5/ -26616 Other private services/5/ 233529 Other private services/5/ -153267 U.S. government miscellaneous services 1245 U.S. government miscellaneous services -4469 Income receipts 764637 Income payments -646406 Income receipts on U.S.-owned assets abroad 761593 Income payments on foreign-owned assets in the United States -636043 Direct investment receipts 370747 Direct investment payments -120862 Other private receipts 385940 Other private payments -349871 U.S. government receipts 4906 U.S. government payments -165310 Compensation of employees 3044 Compensation of employees -10364 Unilateral current transfers, net -128363 U.S. government grants/4/ -36003 U.S. government pensions and other transfers -8390 Private remittances and other transfers/6/ -83970 Memoranda: Balance on goods (lines 3 and 20) -36485 Balance on services (lines 4 and 21) 12329 Balance on goods and services (lines 2 and 19) -24156 Balance on income (lines 12 and 29) 35164 Unilateral current transfers, net (line 35) -16544 Balance on current account (lines 1, 18, and 35 or -5536 lines 74, 75, and 76)/13/ Source: U.S. Bureau of Economic AnalysisMonday, 25 March, 13
  • BOP: Capital & Financial Account ✤ Shows how a country’s assets and liabilities change over time ✤ Remember that the figures in the capital account represent changes (increases or decreases) in assets & liabilities, not the absolute amounts!Monday, 25 March, 13
  • 2008 Capital account Capital account transactions, net 953 Financial account U.S.-owned assets abroad, excluding financial derivatives (increase/financial outflow (-)) -106 U.S. official reserve assets -4848 Gold/7/ 0 Special drawing rights -106 Reserve position in the International Monetary Fund -3473 Foreign currencies -1269 U.S. government assets, other than official reserve assets -529615 U.S. credits and other long-term assets -2202 Repayments on U.S. credits and other long-term assets/8/ 2354 U.S. foreign currency holdings and U.S. short-term assets -529766 U.S. private assets 534357 Direct investment -332012 Foreign securities 60761 U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns 372229 U.S. claims reported by U.S. banks and securities brokers/14/ 433379 Foreign-owned assets in the United States, excluding financial derivatives (increase/financial inflow (+)) 534071 Foreign official assets in the United States 487021 U.S. government securities 543498 U.S. Treasury securities/9/ 477652 Other/10/ 65846 Other U.S. government liabilities/11/ 8626 U.S. liabilities reported by U.S. banks and securities brokers -153443 Other foreign official assets/12/ 88340 Other foreign assets in the United States 47050 Direct investment 319737 U.S. Treasury securities 196619 U.S. securities other than U.S. Treasury securities -126737 U.S. currency 29187 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns -45167 U.S. liabilities reported by U.S. banks and securities brokers/15/ -326589 Financial derivatives, net -28905 Statistical discrepancy (sum of above items with sign reversed) 200055Monday, 25 March, 13