1. Extract 5:
Global trade and BoP
imbalances and global
economic stability

2. Key quotes from the
stimulus
“Economists feared that, whatever the causes,
these global trade and balance of payments
imbalances might endanger the stability of the
global economy.” (Extract 5)
“One of the greatest threats in late 2010 to both
developed and developing economies alike was
the growing global trade and balance of payments
imbalances.” (Introduction)

3. What have we done so far?
 Understood the nature of global trade and BoP
imbalances
 Analysed two competing causes of global trade
and BoP imbalances
 fundamentally misaligned currencies
 macroeconomic imbalances (S ≠ I)
 Researched currency wars and their consequences

4. What we now need to do
 Understand the nature of global economic
stability
 Analyse how trade & BoP imbalances may cause
global economic instability through impact of
 protectionism
 currency wars
 Analyse why trade & BoP imbalances may not
threaten global economic stability
 Evaluate the extent to which global economic
stability is threatened by these imbalances
 are there bigger ‘threats’?

5. What is economic stability
at the national level?
Definition
The avoidance of volatility in
economic growth rates, inflation,
employment and unemployment
and exchange rates

6. Instability Economic
damages long stability reduces
term uncertainty and
performance of promotes
the economy confidence
Why is it important?
Investment, in Confidence
particular is the itself promotes
key to raising AS consumption
and the long run and investment
growth rate

7. The nature of global
economic stability
 Global economic stability requires
 constant growth in global output
 avoiding economic crises
 the promotion of the growth of world trade
 avoiding excessive volatility in exchange rates
and financial markets
 low inflation
 The IMF is charged with promoting global
economic stability

8. Task 1: upload to VLE
 Write an opening paragraph for an essay on the
link between trade and BoP imbalances and global
economic stability
 Include the following
 an explanation of the nature of trade and BoP
imbalances
 brief statements on competing views on why
they have arisen
 statements about fears of what they might
lead to – protectionism and currency wars
 brief explanation of the nature of global
economic stability

9. The rise of protectionism

10. Trade and global GDP
 It is argued that trade raises global GDP
 This arises because trade results in a better allocation
of global scarce resources
 Reducing the volume of world trade through
protectionism will reduce global GDP by reducing global
AD (C+I+G)
Production before trade Production after trade €
(50% of resources (UK partial specialisation,
to each product) Kenya complete specialisation)
Financial Cut Financial Cut
services flowers services flowers
UK 5 5 8 2
Kenya 2 4 0 8
World
total 7 9 8 10

11. Task 2: upload to VLE
 Write a paragraph explaining the impact of
protectionism on global economic stability
 Include the following
 how trade and BoP imbalances may result in
protectionism
 different types of protectionist measures and
what they do
 recent examples of protectionist measures
 an analysis of the impact of protectionism on
global economic stability

12. Currency wars: the 1930s

13. Currency wars: the 2010s

14. Currency wars: US$

15. Currency wars: resources

16. Currency wars: the basics
 Faced with large current account deficits, some
countries may devalue their currencies especially if
they believe that global currencies are misaligned
 The aim is to raise exports by lowering export prices
and reduce imports by raising import prices
success depends upon PEDs
importance of the Marshall-Lerner Condition
 The danger is that this sets of a series of competitive
devaluations / competitive non-appreciations
 This threatens global economic stability by creating
exchange rate uncertainty and reducing the volume and
growth of world trade
 Currency wars may also be indirectly caused by
capital controls which limit FDI
Quantitative Easing (QE) which risks increasing global inflation

17. Task 3: upload to VLE
 Write a paragraph explaining the impact of
currency wars on global economic stability
 Include the following
 why it is feared currency wars may come about
 some recent context
 an analytical explanation of what countries
hope to achieve by devaluing their currency
 an analytical explanation of how currency wars
might threaten global economic stability

18. Taking stock ...
 We now have key paragraphs which can be used in
any essay on the threats to global economic
stability created by trade and BoP imbalances
1. Introduction to stability and imbalances
2. Imbalances encourage protectionism which
threatens stability
3. Imbalances encourage currency wars which
threaten stability

19. Next steps ...
 We now need to think about lines of evaluation
which allow us to
 discuss the extent of the threat posed by
trade and BoP imbalances
 look at ways in which the threat might be
reduced
 explore whether the threat is significant
 question whether trade and BoP imbalances are
the only threats to global economic stability
 suggest whether other threats might be more
significant

20. Task 4: lines of evaluation
 In pairs
 read two of the articles in the folder on the
VLE
 produce a brief bullet point summary of teh
key points of each article (no more than 4
bullet points)
 suggest how these key points might give useful
lines of evaluation for the essay
 feedback to the rest of the class

21. A suggested structure
 Imbalances can be corrected by currency
realignment so that currency wars may not happen
 Refer to real exchange rates
 Look up Plaza Accord
 Imbalances can be corrected by rebalancing
savings and investment or may self-correct
 Conclusion which reaches justified judgement on
extent of the threat
 depends on extent of global economic co-
operation to avert destabilising capital flows
 eurozone crisis may be a greater threat