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Investment and the Trade Balance Lectures in Macroeconomics- Charles W. Upton Net Foreign Investment and the Trade Deficit (As % of GDP), 1980-2000 Investment and the Trade Balance Net Foreign Investment and the Trade Deficit (As % of GDP), 1980-2000 Which is the Chicken and Which is the Egg? Investment and the Trade Balance Net Foreign Investment and the Trade Deficit (As % of GDP), 1980-2000 Which is the Previous Chicken and explanations talk is about Which the the investment as a way of covering our Egg? spending. Maybe it is the other way around Investment and the Trade Balance (d) Investment Opportunities D= I – S + (G-T)+X-M S This is the place to invest because the economy is good. 0 Investment and the Trade Balance (d) Investment Opportunities D= I – S + (G-T) +X-M S This is the Many economists place place their to bets invest on this explanation. because the economy is 0 good. Investment and the Trade Balance An Analogy • You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. Investment and the Trade Balance An Analogy • You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. • Huge investments in hotels, roads, and infrastructure are required. Investment and the Trade Balance An Analogy • You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. • Huge investments in hotels, roads, and infrastructure are required. • A huge negative balance on capital account. Investment and the Trade Balance An Analogy • You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. • Huge investments in hotels, roads, and infrastructure are required. • A huge negative balance on capital account. • Is this bad? Obviously not. Investment and the Trade Balance Evidence • Does the trade balance track saving? Investment and the Trade Balance Evidence • Does the trade balance track saving? No Investment and the Trade Balance Evidence • Does the trade balance track saving? No • Does the trade balance track government deficits? Investment and the Trade Balance Evidence • Does the trade balance track saving? No • Does the trade balance track government deficits? No Investment and the Trade Balance Evidence • Does the trade balance track saving? No • Does the trade balance track government deficits? No • Does the trade balance track investment opportunities? Investment and the Trade Balance Evidence • Does the trade balance track saving? No • Does the trade balance track government deficits? No • Does the trade balance track investment opportunities? Yes Investment and the Trade Balance Trade and Investment • • • • 19th Century Trade Balances Post World War II The Business Cycle International Comparisons Investment and the Trade Balance th 19 Century Trade Balances • In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British. Investment and the Trade Balance th 19 Century Trade Balances • In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British. • There were significant investment opportunities in this rapidly growing economy. Investment and the Trade Balance th 19 Century Trade Balances • In the last part of the 19th century, the United States ran a substantial current account deficit, financed substantially by the British. • There were significant investment opportunities in this rapidly growing economy. • Both Americans and the British benefited. We got a higher capital stock, while British investors earned a higher return than they could at home. Investment and the Trade Balance Trade after World War II • At the end of WW II, the United States ran a significant current account surplus, for exactly the same reason. The War devastated Europe, and investment opportunities there were highly profitable. Investment and the Trade Balance Balance on Current Account 2 As % of GDP 1 0 -1 -2 -3 -4 When times are good, there are investment opportunities and the trade balance is bad. -5 1959 1963 1967 1971 1975 1979 1983 1987 Investment and the Trade Balance 1991 1995 1999 Balance on Current Account 2 1 0 -1 As % of GDP -2 -3 -4 -5 1959 1963 1967 1971 1975 1979 1983 1987 Investment and the Trade Balance 1991 1995 1999 Balance on Current Account 2 1 0 -1 As % of GDP -2 -3 -4 -5 1959 1963 1967 1971 1975 1979 1983 1987 Investment and the Trade Balance 1991 1995 1999 Trade Deficits and Business Cycles Investment and the Trade Balance G-7 Experience Investment and the Trade Balance G-7 Don’t invest Experience in slow growing countries Investment and the Trade Balance End ©2005 Charles W. Upton. All rights reserved Investment and the Trade Balance
