Global Economics and Politics

  International trade has been growing fast in the 21st century. In USA International trade has roughly tripled in importance compared with the economy as a whole Imports and exports have both increased but imports have grown more. This has led to a large excess of imports over exports. How is this paid? The money is supplied by inflows of capital, foreign investments which want a stake in the U.S. economy. Earlier this amount of inflow of capital was inconceivable. This is a sign of growing international capital linkages in this example. In 2009 both imports and exports plunged which reflected the global economic crisis which started in 2008. It is an example of the close link between world trade and the overall state of the world economy.  International economic relations are more crucial for other countries than USA, which as a result of its size and the diversity of its resources, relies less on international trade than almost any other country. Average of exports and imports as  a share of country GDP: Belgium 90%, USA 15%, Germany 45% International Economics uses the same fundamental methods as domestic transactions. Individuals motives and behavior is the same regardless of the situation. Seven themes recur throughout the study of international economics  the gains from trade the pattern of trade  protectionism the balance of payments exchange rate determination international policy coordination international capital market Beans from Hawaii and Mexico sold in Florida. Path same but different: Mexico imported, Hawaji internal trade. International trade can be affected by government decisions and currency rates, such as quotas and as an example... if the  value of the Mexican currency falls against the dollar--> Now Mexican coffee is cheaper for Americans.  Constitution forbids restraints on interstate trade and all U.S. states use the same currency, so this kind of example can't occur with the beans from Hawaii.  The gains from trade Remember! In international economics single insight important- there are gains from trade- meaning that when countries sell goods and services to each other, this exchange is almost always to their mutual benefit.  Common misconception- trade is harmful if there are large disparities between countries in productivity or wages.  People in developing countries such as India fear that if international trade opened, they won't be able to compete against high technology countries. On the other hand, high technology countries fear of diminishing living standards if trading with less advanced lower wage countries occurs.  Chapter 3 shows in how all the parties benefit international trade are even in a situation where another country is more efficient than other, and producers in the less efficient country can only compete with price. We will also see that trade provides the possibility to export goods which use heavily resources that are locally rich and import goods which use heavily resources that are locally narrow. International trade also allows countries to specialize in a narrower range of goods, the potential for larger scale production.  Not only benefits limited to the trade in tangible goods, also migration, borrowing & lending.  International trade can hurt particular groups within the nation, in other words, international trade will have a strong effect on the distribution of income. The important theme is that the International trade can make people redundant with particular narrow skills and affect the distribution of capital ( workers vs owners of capital). it has become clear that real wages for low skilled workers in USA have been declining, as a result of imports from developing countries? The Pattern of Trade The main concern for economists is to understand the patterns of international trade- who sells to whom- and also how to observe these paths when discussing recommendations for...

Douglas North Economy is a theory of choice -one way to study how people make decisions Politics: Politics is about ''who gets what, when and how'' Harold Laswell  Robbins: two categories of economics Positive: Economic analysis: price value exchange-> how things are right now, how prices change, how currencies change-> do analysis how they are Normative: Political economy: More about how things should be, what kind of tax rates should, minimum wage. Focus on things as they are. call economists why inflation is so high, call economist. ideas value judgements policy  -economistic models probabilistic Friedman: -Potivie and normative can't be separated. Ex minimum wages.same aim but normative consideration lead to different means.   -1.Donald Trump, conservative ideas come up--> China and other developing countries getting ahead. 2.Protectionism.  Protecting own domestic economy to increase internal demand. Fear of losing balance.  3.Automatisation, digitalization--> conservative--> people don't understand.  -->Permanent jobs to part-time jobs.  -->pecialized jobs, loss of traditional jobs.  -->Change of working routines.  -Digitalization    2030 -More open markets, new ideas overrule. Change of generation. two generations using and living in the Internet -Not stable, Oil supply problems--> Potential for world economic risks -EU more specific regarding  in handling crises, more integrated monetary Union -China world leader in markets, Developing countries in better market positions-->automatization of manufacturing -The World more interconnected   -uncertainty (unknown unknown) and risk (knownunknown)   are not the same things  European Commission White Paper 1.Carrying On 2.nothing but single market 3. Those who want more, do more 4.Doing less more efficiently, not as much structural funds as today   Structural fund definition: Definition of EU structural funds. This is the EU's flagship development programme which is designed to narrow the gap between the rich and poor parts of Europe. ... The majority of that spending is allocated to three funds: the European Regional Development Fund (ERDF), the European Social Fund (ESF) and the Cohesion fund ...by Financial times Lexicob World economic slowing down after a recession. Structural problems or ..jakso....?  TTIP Transatlantic trade investment Partnership.       Three main institutions IMF  Financial assistance World Bank Development assistance Wto trade policy regulation and negotiation     Noodle Bowl map-- reflection in universal agreements aren't succeeded WTO not successful 164 member states each have one vote. IMF votes based on investments.                

Unilateral track -new trade opportunities-destroy old ones-gain new ones Example. Estonia entering Europe Unilateral agreement with Ukraine, rice After entering EU--> EU trade agreements--> End on unilateral agreement -Estonian relationship with Ukraine got worse Example 2 French bottles cheaper in Estonia than domestic producers --> Economies of scale--> Larger economies can produce with lower unit cost   WTO -a weaker multilateral trading system --> EU, USA, Japan--> historically if they had mutual agreement--> votes trough -India, China Brazil  -Intellectual properties, good for Microsoft, Hollywood--> not good for developed countries ---> TRIPS -Behind the curtains, bigger economies press on the decisions Example Cars exported from Japan>USA car manufacturing struggling The USA brought voluntary Export quota agreement -> Japan forced to undersign under circumstances something ''worse'' could happen ->Japan chose to limit its exports, USA car manufacturing benefits ->Japan cars built in the USA, Subaru struggling in keeping up with the demand as they built the cars in Japan--> Export limits limit their possibility to supply and the increasing demand  -Minilaterialism  -WTO, IMF and World Bank criticized by Opponents of globalization and corporations. Developing countries for dominance by US, rich countries, and corporations --> Scholars for institutional flaws IMF: has imposed misguided policies World Bank: Wates resources on corrupt elites, WTO: Dominated by rich countries, corporations -World bank more aid organization than bank   Why countries trade -price difference -Autarky price--> completely protected markets--> no trade FREE TRADE Exports=imports, country with lower price exports-> prices rise-> suppliers grain a country with higher price imports-> prices go down->demanders gain, suppliers lose ======>>> WORLD GAINS Prices -determined by the productivity of labor, Price of labor (w=wage, Exchange rate -since w and W are larger commons to all sectors --> main determinant of how individual sectors trade is productivity   Adjustment mechanism -if all of a country's prices too high for export --> exchange rate will fall or wages will fall  Gains of trade never equal--> Theory that even though one of the participants is  a loser, in absolute they all gain as a result of wider possibilities (modern economics theory) Ricadrion model One factor of production model: Labor -Absolute advantage vs comparative advantage, lawyer & secretary example -comparing at what you do best instead at comparing with everything you do (microeconomic theory)                 

Sources of comparative advantage -larger firms dominating digital markets in EU--> imperfect competition   The Heckscher-Ohlin Model -Factors proportions model -Comparative advantage determined by factor endownments: production facotrs--> some countries focused on one individual factor--> China cheap Labour, other... cheap land... -Factor intensities: Agriculture--> requiring land= land intensive--> requiring cheap labour=labour intensive, need finding cheap labour --> requiring capital -Two differences drive trade in H-o model Countries differ in endownments of factors -labour,capital,land,skill (human capital).... resources 2. Industries differ in factor intensities   -Countries export good that use abundant factors Intuitition --abundant factors are cheap (in Autarky=closed markets) --> factors are perfectly mobile within a country accross industires, same resource can be used in energyu production or car manufacturing   Effects of Trade according to H-O theory Trade causes: Improts decrease, exports grow--> Factors to move industires--> towards export sector   For factor prized: Price equalization, China labour prices increase,>USA decrease Pareto efficient outcome: Thinking about also what happens to the ones left outside of welfare. Monopoly-one seller Oligopoly- few selles Monopolistic competition- many sellers but each with some market power Oligopoly -in many international markets     The new trade theory -Subsidies making each contributor coming to the markets, even though would be negative profit without subsidies   ----> Boeing and Airbus example ---> Boeing goes to USA government, Airbus enters markets as a result of subsidies ---> USA gov subsidizes Boeing ---> Case taken to WTO court   Tariffs Ad valorem: % of value Specific: Dollars per unit                

-Terms of trade price of its (country's) exports relative to its important tot= p exports/p imports -artificial demand: clubs keep people in the queue-->consumers think that the place is popular   Pizzeria in Tallinn, limited quantity 90/per day--> after closed. Creates artificial demand, people want to go look and try this place   -Eu multifunctionality with Common Agricultural Policy=Cap -->Explained by reserving way of life, supporting old farming ways.  -Unfair Trade Laws -Andi-Dumping Duties--> selling under fair prices  

Trade Balance: What does it not Mean. -deficit doesn't mean that we are losing money.  -deficit means we are losing jobs.  --> imports are good we dont produce and exports are good we do produce. Increase in imports can be the cause of more people are working, earning income and buying more from abroad---> doesnt mean that jobs lost as imports went up.  - Turmp backs these statements often. Doesn't mean that there isn't any backing in his claims.    International transactions -Current Account; Trade in goods,trade in services, investment income and unilateral transfers (i.e gifts, foreign aid). -Financial account; Incldues only changes in asset holdings. A change in Estonian ownership of assets abroad, foregin ownership of assets in Estonia Balance of payments required! Example: China exports to USA-> trade deficit in the current account. Chinese people invest in to USA shares and infra--> Financial account surplus   -Balance of trade= crredits minus debits on trade transactions -Current account deficit--> Current account balance/GDP--> predict financial crisies -scoreboard of macroeconomic imbalances, 10 indicators--> if red--> feedback to the countries -In EU if current account balance less than 5%. -In case of surplus 6%   -trade growth has stayed flat in recent in Estonia. Eu has helped Estonia to trade with Russia. More exporting to Russia than importing from there. With other EU countries trade deficit -global value chains, imports require exports. Ericson imports parts from UK, assembles in Estonia and Exports.  -Cravity theory- trading with closing countries Output y=c+I+(X-M) Income= C+S, saving Trade deficit= spending more than our income, X-M<0, means that we are spending (C+I+G) more than our income Y     Exchange rates Bilateral Nominal Exchange rates:the actual rate between a pair of currencies -size of an exchange rate means very little. Wheter ero is worth more or less than a dollar is not important -Currency Envy, people do care -Multilateral exchage rates: Tells trhe overall value of a currency, you need an index relative to many others -Real exchange rates: corrected for inflation ---> E= euro/dollar nominal exchange rate R=EP/PU Forward Exchange Rates -These are rates of exchange for later, not today rates for exchange today are called spot rates -in forward market, no money changes hands today; a forward exchange is a contract for both buyer and seller to transact     ---  

Asset theory -Exchange rate adjusts to eliminate the motive to shift assets between currencies -Penson Fud Tuleva in Estonia, idea that no fund managers needed--> investments to index funds. Remember BlackRock fund -markets highly rational, consumers invest money according to where the expected higher return is -Warren Buffet investment strategy: Investment into undervalued assets - 2 ways to think: Prices already reflect the through value (perfect markets) or Price are not in the equilibrium and some are undervalued.    Supply and Demand model of the market for Foreign Exchange  Foreign exchange than foreign currency. Nit the marker for holding currency such as studied in some courses eg the Money Market.  - Example  Price of E= Exchange rate, Quantity of Euro -Sources of supply of E - US exports to EU and gets payment in Euros. , US Capital inflows.. US investors buy US bonds etc...Other... Sources of Demand for E -US imports, US capital outflows Use of the model- price in the diagram E= price of the foreign exchange, E= S/Eur--> DOLLAR in the Y axis--> change in demand for Eur re -Implications of the model Nixon 10% surcharge on imports--> reduces demand for imports and demand for Eur, shifts dEur to the left--> causes dollar to appreciate US interest rates increase --> US bonds more attractive, causes increased capital inflow to US, increased demand for  S and thus supply of Eur -> shifts Supply of Eur right   Pegging the exchange rate - fixed or floating exchange rates -Central bank buys and sells currencies so that supply and demand are not perfect in the market PEGGING meaning - central banks set a par value, intervene only if rate moves some distance above or below this par value--> this range of movement is called an exchange rate band -Manager float-does not try to set new target to the exchange rate, but to slow its rate of change. Purpose: to dampen fluctuations. -Crawling peg-slow and predictable Who pegs? -developing counties, Brazil float Argentina Pegged to US Dollar, Bulgaria pegged to euro, China pegged to the dollar until summer 05 and july 08 ot july 2010, Costa Rica crawling peg, India and Egypt managed float -Money supply--> money in the circulation--> US bank buys EUr, Dollars to circulation and increase in money supply.As US sells the EUR dollars out of circulation and money supply decreases.  -Reserve ratio:  how much money the banks need to keep in reserve to secure its functions.  -Overvalued peg leads to a crisis, undervalued not -US Dollar special case: many countries reserves are dollar-denominated assets, mostly US govt bonds--> if currencies kept undervalued, that means the dollar is overvalued  -Americans benefit from the high dollar they can buy cheap food and services -americans borrow in dollars in order to do it--> if other countries stopped lending for the US, the dollar would fall so would the value of US debt.  The US DOllar vs Chinese Renminbi -why US pressures China to appreciate yuan? to make it easier to sell US goods.  -Levy argues: Tariffs against China won't work-> US will jsut switch to importing from other low-cost countries-> US trade deficit will be unchanged ---> Instead usa should reduce gov. spending.  PEGGING vs FLOATING China currency floating, USA expansion, the supply of dollar shifts right, more US imports from China, Yuan appreciates.   Fixed versus Floating Exchange Rates -Pegged are more fixed and floating exchange rates are more flexible.    Pros and cons of floating -macro effects- depreciation -Micro- uncertainty exports and imports, instability --> both can be costly for traders   ---------------------------------------- 17.11   -Capital controls limit inflows and outflows of capital.  The impossible trinity- Triangle  1.Full capital controls--> USA federal reserve...

EUROPEAN MONETARY UNIFICATION AND THE EURO -Robert Mundell, check.  EMU, European monetary union -12 original members, now 19.  -Euro controlled by European Central Bank. European snake- exchange rate tunnel, not completely fixed or free float-> this policy was followed by EU in  73.   Maastricht Treaty- Formation of more wide ERM--> Finland joined.  -UK and Denmark dropped.  Need for Convergence -countries with same currencies should become similar -> Example inflation rate.  -if countries have different rates of inflation the high inflation countries will lose markets to low inflation countries.  -if countries have different interest rates capital will flow to high-interest rate countries seeking a higher return. --> Countries with common currency inflation and interest rates, budget and government deficits.   Maastricht  Convergence Criteria 1. National currency in ERM for 2 yeras 2. Budget deficit <3% of GDP 3. Government debt < 60% of GDP 4. Inflation <1.5% above the average of lowest 3. !Estonia when entering EU! 5. Long-term interest rates <2% above average of lowest 3 Without adjustment -when one country is hit with  a shock that others are not WInners and losers of EMU Winners: Multinational companies, costs of operating in multiple countries were reduced. Europe's biggest banks were expected to gain through consolidation across borders. Consumers, able to comparison-shop across borders.  Losers: Small firms (e.g. shops, restaurants), for whom changeover was costly with little benefit. The EUro zone crisis -In process of negotiating a mechanism to 1. provide loans to troubled countries 2. put pressure on them for austerity--> cut spending and raise taxes. 3. FOrm banking union to safely manage bank failures.  Greek debt -tradeoff between Bailout money from others to pay it off--> favoured by weaker countries (France) Bonds cut for private investors. --> supported by the stronger countries (Germany) -structural deficit in EU budget, a nominal deficit in bookkeeping, revenue vs expenses. Structural adjusted to by business cycles. Potential annual growth...what is nest years forecast. GDP gap!! Hard to say exact GDP gap... many ways to calculate.  NB! Japan high loan to GDP ratio. Japanese gov loans bought by Japanese individuals.  Headline and underlying inflation -one includes the energy prices.  1. GDP- growth, is the country  economy stuck or evolving 2. High Government debt--> loan interest, credit rating 3. Inflation/deflation --> purchasing power 4. interest rate on loans-->  availability of loans, consumer ability to pay  5. Credit quality of loans              

Lecture 2 06.09.2018. Balance of trade =Exports minus Imports Trade surplus= Bal of Trade >0 Common misinterpretations Deficit= we are losing money--> misconception Earlier kind of true-> money was gold, there was no inter capital flow, imports>exports meant you were spending more than earning Today there are capital flows a country with imports> exports can Borrow and sell assets to foreigners  Definit= we are losing jobs --> misconception Scott; connection exports= gained jobs, Import=jobs lost.  --> he assumes that imports replace domestic production--> sometimes true... but mostly not.    Griswold: US economy has done best when the trade deficit was growing--> misconception --> High incomes led to higher imports... not the cause of the trade deficit!!!! Deficit means other countries are misbehaving--> misconception --> things affecting; competitive  advantage (China), currencies    Germany example--> german growing domestic demand through other countries trade deficit--> not necessarily, can be an effect on development that German goods are demanded.    International transactions are divided into two parts: Current Account and Financial Account.  ---> Remember that balance is needed.    Current account: Trade in goods, services, investment income and unlater transfers (gifts, foreign aid). FInancial account: Includes only changes in asset holdings  -Balance part of the current account! Remember.  Indicators of crisis, 5: 1.Current account deficit, EU scoreboard of macroeconomic imbalances-toolkit. Note Maastricht indicators: 3% deficit/GDP, 60% debt/GDP 2. 3. 4.   Current account deficit concern of Donald Trump--> mainly looking into the deficit of goods--> Remember that other indicators are important too! Short period Current account deficit does not risk if its related to a fastly growing economy Estonia has currently trade deficit Biggest exporting countries for Estonia: Sweden, Finland Importing countries: Germany, Finland Trade surplus with Finland and Sweden Trade deficit with Germany   Esports of services; EBS in Helsinki Trade deficit: borrowing from foreigners, selling shares to foreigners--> the current USA   Lecture 20.09.2018 Forms of Exchange Rates Bilateral rates tell a value of a  currency relative to a single other currency To get the overall value we need to compare currencies with indexes   Rates of inflation (of prices) are important for exchange rates --> important to at real exchange rates as well as nominal rates ------------------------- ''By contrast, the real exchange rate R is defined as the ratio of the price level abroad and the domestic price level, where the foreign price level is converted into domestic currency units via the current nominal exchange rate''  Formally, R=(E.P*)/P, where the foreign price level is denoted as P* and the domestic price level as P. A decrease in R is termed appreciation of the real exchange rate, an increase is termed depreciation ---------------------------------   Forward Exchange rates: no money changes hands today; a forward exchange is a ''contract'' for both buyer and seller to transact.    What determines exchange rates -Markets; supply and demand  and governments/central banks; if they intervene in the markets   3 theories of exchange rates 1.PPP- purchasing power parity-useful bust mostly wrong- works best only in the very long run -Exchange rate reflects relative purchasing powers of two currencies.   -if one country prices are rising faster then another's, the currency of the first should depreciate -if good gets more expensive, its currency should get less expensive.    Prediction: Bilateral exchange rate between currencies A and B   PP used to guess if currency is over-or...

Chapter 13   National Income Accounting and the Balance of Payments   Why individual countries fortune differs? Example different circumstances after the recession (China slow growth, USA contradicting effect) Definition: Microeconomics: Studies how individual economic actors collectively determine how resources are used --->International microeconomics study example--> how individual production and consumptions decisions produce patterns of international trade and specialization  --> government intervention or market failures can cause waste even when all the factors of production are fully in use.    Macroeconomics: Studies how economies overall levels of employment, production, and growth are determined. Studies the behaviour of an economy as a whole.  --> We will learn how the interaction between different national economies affect the worldwide pattern of macroeconomic activity.    Studies four aspects of economic life: Unemployment, Saving, Trade imbalance and Money & The price level.    National Accounting concepts; production and international transactions two tools: 1.national income accounting: records all the expenditures related to a country'es income and output.  2. balance of payments accounting; informs about the country's debts to foreigners and fortunes of its exports and import-competing industries. Shows also the connection between foreign transactions and national money supply.    National Income accounts: