KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 1 International Economics...

KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 1

International EconomicsPart 1

Dr. Stefan KoothsBiTS Berlin

(winter term 2013/2014)www.kooths.de/bits-ie


Contact data

Dr. Stefan KoothsDeputy Head of the Forecasting CenterKiel Institute for the World Economy

Office BerlinIn den Ministergärten 810117 Berlin030/2067-9664

[email protected]

mailto:[email protected]


The Kiel Institute for the World Economy


Outline

1. Introduction and Overview

2. Systemizing and Recording Cross-border Economic Activity

3. The Pure Theory of International Trade

4. Trade Policy: Free Trade vs. Protectionism

5. Foreign Exchange Markets and the Open Macroeconomy

6. Case Study: The Euro Area Crisis

7. Summary: The Key Lessons Learnt


Outline

1. Introduction and Overview Motivation, key questions, and methodology Course scheme








Cross-border economic activity


International division of labor


Causes of Globalization (overview)

Liberalization of world trade Liberalization of cross-border capital flows Collapse of centrally-planned economies Increased political/social stability Improved transportation infrastructure Progress in telecommunication systems/internet technologies Creation of economic blocs (e.g. EEC/EU, NAFTA, MERCOSUR) Spread of technological know-how via FDI Better education for more people


Effects of Globalization (overview)

Generally: More choices (deeper markets) More competition on world markets Increased number of tradable goods and services International competition for production sites

(globally integrated value-added chains) Accelerated structural change/more innovations

(pressure on domestic labor markets) Regulatory competition, pressure on tax and transfer systems

(less latitude for national policies) Intensified international dependencies

Net gains, but domestic winners and losers (preview)


Why „International Economics“ is different (and why it is not)


Economics and the nation state


Microeconomic and macroeconomic foundations


Methodological individualism

General method» Individuals as point of departure for economic analysis» Explaining social processes via actions of involved persons

Individuals …» … are diverse» … have exogenous preferences» … are capable of acting on their own

Subjectivism» Individual preferences» No scientific inter-subjective comparisons of utility


Gains from trade and voluntary contracts


Pitfalls of collectivist analysis


Outline

1. Introduction and Overview Motivation, key questions, and methodology Course scheme








Literature, CAL software, and website

Literature» Brümmerhoff, D. (2007): Volkswirtschaftliche Gesamtrechnungen; 8. Aufl., Oldenbourg Verlag:

München.» Dieckheuer, G. (2001): “Internationale Wirtschaftsbeziehungen”, 5. Aufl., München/Wien.» Eibner, W. (2006): “Understanding International Trade: Theory & Policy/Anwendungsorientierte

Außenwirtschaft: Theorie & Politik”, Oldenbourg Verlag: München/Wien.» Kooths, S. (2000): Gesamtwirtschaftlicher Modellbau mit MAKROMAT; Verlag Vahlen: München.» Kooths, S. (2013a): Wirtschaftspolitik mit Weitwinkel; in: Frankfurter Allgemeine Zeitung, 1. Februar

2013, S. 12 („Ordnung der Wirtschaft“).» Kooths, S. and B. van Roye (2012): “Euro Area: Single Currency – National Money Creation”, Kiel

Working Papers, No. 1787, Kiel.» Pugel, T, A. (2012): “International Economics”, 15th Edition, McGraw-Hill: New York.» Snower, D., J. Boysen-Hogrefe, K.-J. Gern, H. Klodt, S. Kooths, C.-F. Laaser, C. Reicher, B. van Roye, J.

Scheide and K. Schrader (2013): “The Kiel Policy Package to Address the Crisis in the Euro Area”, Kiel Policy Brief, No. 58a, Kiel.

Computer-Assisted Learning software (optional)» ACTAS (www.kooths.de/actas)» MAKROMAT (www.makromat.de)

Course Website: www.kooths-de/bits-ie

http://www.kooths.de/actas

http://www.makromat.de/

http://www.kooths-de/bits-ie


Outline


2. Systemizing and Recording Cross-border Economic Activity The Balance of Payments (BoP) The International Investment Position (IIP)







Types of cross-border transactions

Trade flows» Goods (merchandise)» Services

Cross-border incomes(compensation for use of production factors)» Labor: Compensation of employees» Capital: Investment income

Transfers» Current transfers (regularly) » Capital transfers (one-off)

Financial transactions» Nonofficial: Direct investment | Portfolio investment | Other investment» Central bank: Changes in official international reserves


Accounting principles:Credit and debit items (double-entry bookkeeping)

Credit item (measured with a positive sign/entry on the left side) …» … results from a transaction for which the country must be paid. It

sets up the basis for a payment by a foreigner into the country – that is, it creates a monetary claim on a foreigner.

Debit item(measures with a negative sign/entry on the right side) …» … results from a transaction for with the country must pay. It sets up

the basis for a payment by the country to a foreigner – that is, it creates a monetary liability against a foreigner.


Valuation: cif vs. fob


People in the BoP: Residents vs. nationals


Timing: Accrual principle


The consolidated BoP account


BoP sections I: Current vs. financial account


BoP sections II: The detailed BoP structure (IMF BoP Manual)

IMF Balance of Payments Manualhttp://www.imf.org/external/pubs/ft/bopman/bopman.pdf

http://www.imf.org/external/pubs/ft/bopman/bopman.pdf




Official reserve assets and the role of the central bank


Real-life BoPs

Statistical Discrepancies=Net Errors and Omissions=Balance on Unclassified Transactions


Interpreting BoP balances (BoP and National Accounts)

Goods and services balance / trade balance (NX)» Net exports of both goods and services

Current account balance (CA)» Net credits on the flows of goods, services, income, current transfers

Financial account balance (FA)» Net credits involving changes in nonofficial foreign financial assets and

liabilities Overall balance / official settlements balance (B)

» Current account balance + (nonofficial) financial account balance [+ statistical discrepancy] = ‒ Increase of official reserve assets

Link to National Accounts» NX and GDP» CA and GNI» CA + net capital transfers and Net external lending


Accounting exercise (Reporting country: USA)

(1) At the end of the year, Northern Illinois (a U.S. utility company) buys $34 million in natural gas from a Canadian firm. It does not pay in cash immediately, but instead issues a promissory note saying it will pay the bill (plus interest that will accrue over time) one year later.

(2) Brazilian soccer fans spend $6 million as tourists in the U. S. during a soccer tournament, and they pay for their hotels, meals, and transportation by using the deposits that they have at a New York bank.

(3) The U.S. Treasury pays $25 million in interest on its past borrowing from Swiss investors, paying with checks on a New York bank.

(4) The U.S. monetary authority (Fed) in its official role becomes concerned that the exchange rate value of the dollar may appreciate against the Japanese yen. It decides to purchase yen-denominated bank deposits from a major Tokyo bank and pay by transferring $15 million of its New York bank deposits to this Tokyo bank.

(5) The U.S. government gives $8 million in foreign aid to the government of Egypt in the form of wheat from U.S. government stockpiles.

(6) Mexican immigrant workers in the U.S. send $2 million from their bank accounts at a Phoenix-based bank as remittances to their families in Mexico.


Outline


2. Systemizing and Recording Cross-border Economic Activity The Balance of Payments (BoP) The International Investment Position (IIP)







Stocks vs. flows


Linking BoP and IIP


Transaction-based flows vs. revaluations of stocks


Germany: Current account, capital transfers, and IIP

-50

0

50

100

150

200

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Balance on Current Account (rhs) Net Errors and Omissions (rhs) Net Capital Transfers

IIP Transaction-based IIP (1992 ff.)

Annual data.Source: Deutsche Bundesbank, IfW calculations.

Bn. Euro Bn. Euro

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KOOTHS | BiTS: International Economics (winter term 2013/2014), Part 1 1 International Economics...

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