Lecture 6

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

 

 

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