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Eco 3370 ppp #1 A Bird Eye View of the Current* World Economy: Trade and Finance J.D. Han King’s University College, UWO *prior to the 2008 financial crisis 1 1. Current Fundamentals of World Economy (U.S.) (Asia, etc.) Growth Government Budget Deficits rises Consumption Rises; Savings lags Lack of Investment Managed FOREX Savings Glut Export Promotion s Capital Flows ㅇ low interests ㅇ Asians buying U.S. finan/real Assets 9.11 Current Account Deficits (offsetting) Current Account Surplus External Liability Position Imbalance Current Account Imbalance 2 2. Flows of Goods U.S. is a voracious absorber of world products particularly from the East Asia U.S. Trade Decifits (Import in excess of Exports) has been the largest and increasing rapidly while the East Asian countries have been accumulating Trade Surplus with U.S. - International Currencies(monies) flow to the East Asia The East Asia is becoming the ‘Factory of the World’ 3 World: Current Account Trends of Major Countries (100 Million $) 2004 1987 1997 -1,607 -1,409 -6,681 EU 15 Countries 252 883 477 Japan 844 968 1,721 Asia 7 Countries1) 284 367 1,678 (China) 3 370 687 (Taiwan) 180 71 186 (Korean) 101 -84 276 Latin America -98 -668 173 -73 141 909 U.S. Middle East OPEC Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and Indonesia Data : IFS, Bloomberg 4 World: Current Account Deficits (100 million U.S. $; %) 1987 10 Largest Deficits 2004 -2,254 (84.5) 10 Lagest Deficits -1,607 (60.2) U.S. Canada -134 (5.0) U.K. -126 (4.7) Saudi Arabia -98 Australia -8,719 (92.9) -6,681 (71.2) Spain -492 (5.2) U.K. -419 (4.5) (3.7) Australia -400 (4.3) -80 (3.0) Turkey -155 (1.7) India -52 (1.9) Italy -151 (1.6) France -44 (1.7) Greece -131 (1.4) Argentina -42 (1.6) Portugal -127 (1.4) Norway -41 (1.5) Hungary -88 (0.9) Denmark -30 (1.1) Mexico -74 (0.8) U.S. Note : 1) ( ) has the share in the world Sources : IFS, Bloomberg 5 World: Current Account Surplus (100 million $, %) 1987 10 countries 2004 1,862 (96.6) 10 countries 6,343 (73.6) Japan 844 (43.7) Japan 1,721 (20.0) Germany 469 (24.3) Germany 1,034 (12.0) Taiwan 180 (9.3) China 687 (8.0) Korea 101 (5.2) Swiss 602 (7.0) Swiss 63 (3.3) Russia 599 (7.0) South Africa 51 (2.6) Saudi Arabia 315 (6.0) Kuwait 46 (2.4) Norway 344 (4.0) Mexico 42 (2.2) Sweden 285 (3.3) Netherlands 42 (2.2) Singapore 279 (3.2) Malaysia 26 (1.3) Korea 276 (3.2) Note : 1) ( )has the share in the world Data : IFS, Bloomberg 6 Current Account Trends of U.S.: ‘Ever Increasing’ 100 (billion S) (%) 1 0 0 -100 -1 -200 -2 -300 -3 -400 -4 -500 -5 -600 Current Account Balance -6 -700 Current Accout Bal./GDP -7 -800 -8 -900 -9 80 82 84 86 88 90 92 94 96 98 00 02 04 *There is a big decrease in CA deficits to $390 billions in 2009 due to recession. 7 U.S.: Trade Deficits with (100 mil. $, %) 1989 1997 2004 EU 15 countries 10 ( 0.9) 167 ( 9.2) 1,045 (16.0) (Germany) 80 ( 7.3) 186 (10.2) 459 ( 7.0) Japan 490 (44.7) 557 (30.5) 752 (11.5) Asian 7Countries 333 (30.4) 795 (43.5) 2,270 (34.8) (China) 62 ( 5.6) 497 (27.2) 1,620 (24.9) (Taiwan) 130 (11.9) 122 ( 6.7) 129 ( 2.0) (Korea) 63 ( 5.7) -19 (-1.0) 198 ( 3.0) Latin America 92 ( 8.4) 64 ( 3.5) 841 (12.9) Middle East OPEC 43 ( 3.9) -2 (-0.1) 221 ( 3.4) 128 (11.7) 245 (13.4) 1,387 (21.3) 99 ( 9.1) 179 ( 9.8) 668 (10.3) 1,096 (100.0) 1,826 (100.0) 6,517 (100.0) Others (Canada) Total Note : 1) minus (-) indicates the U.S.’s surplus Data : U.S. Government In Sum: Trade deficits are moving from Japan to China. 8 Updated statistics can be found in many places, such as http://www.epi.org/publications/entry/international_pict ure_20100211 http://www.census.gov/indicator/www/ustrade.html Basically the Situations involving U.S. and East Asia or China have not changed, but accentuated. 9 Making a Sense in the Context of Macroeconomics National Income Accounting: Savings, Investment and Trade: U.S. and Major Partners Blue- Saving Red – Investment Orange – Current Account Observation: 1)Current account Deficits and Investment are + vely corrleated. Current account Surplus and Investment are –vely correlated.. 2)Current account Deficits and Savings are –vely correlated. Current account Surplus and Savings are +vely correlated. 10 Let’s think about: 1. What will be the limit to the U.S. trade deficit? 2. How come the US can increase the trade deficits so much without any constraint? 3. How come this flow of funds and the shifting of production(=income generation) from the U.S. to East Asia does not decrease the National Income of the U.S.? 4. Is there any interconnection between X-M, and S and I? 5. What about the causation in the above relationship? Which causes which? 11 For above Question3: What is happening to the component variables in the following equations? East Asian Countries’s GNP Y=C+I+G+X-M U.S.’s GNP Y=C+I+G+X-M 12 For Q 4, and Q5, we will have a separate appendix for the National Income Accounting 13 3. Flows of Capital International Liquidity does not stay invested in the East Asia Monies are flowing back to U.S. This fuels U.S. imports from Asia This gluts U.S. financial market, pushing Stock Prices up and Interest Rates down 14 External Liabilities (Debts) Trends (billion dollar) 1997(A) 2001 2003 2004(B) Change (B-A) 97-04 Cummulative Current Account Deficits <Major Deficits Countries> U.S. -822 -2339 -2372 -2542 -1719 -3123 Australia -186 -194 -358 -421 -235 -163 U.K. -109 -104 -70 -372 -163 -211 Mexico - -248 -277 -310 -62 -44 958 1360 1613 1784 825 958 85 162 169 269 183 128 308 355 474 530 222 264 <Major Surplus Countries> Japan Germany Swiss Singapore - 71 88 88 16 85 Taiwan - 226 337 387 161 91 Data : IFS 15 U.S.: Net External Liabilities (Debts) =Credit from the rest of the World (as of GDP, %) 30 25 20 15 10 5 0 -5 1980 1984 1988 1992 1996 2000 2004 -10 -15 16 Who are buying U.S. Bonds? (100 mi. $) 1990~94 1995~99 (A) Post 2000 (B) Net (B – A) 2,710 5,890 18,280 9,690 Asian Countires 1,200 3,010 9,500 6,490 European Countries 1,150 4,280 4,880 600 Latin Americans 210 1,080 1,470 390 Total Data: U.S. Government Documents 17 4. FOREX International Capital Flows accompany the imbalance of Merchandise Flows (in the opposite direction) “Capital Flows (of Currencies) may destabilize Relative Prices of Currencies or FOREX rates” 18 U.S. : Current Accounts and Currency Value FOREX (1billion (% 150 400 125 200 100 0 75 50 25 -200 Current Account External Value of $ 0 -400 -600 -800 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 19 The U.S. Dollar has kept up its value pretty well in light of the worsening Current Account. Why? If capital does not flow back from East Asia to U.S., the U.S. Dollar may have lost more values. 20 Recap. Current Fundamentals of World Economy (U.S.) (Asia, etc.) Growth Government Budget Deficits rises Consumption Rises; Savings lags Lack of Investment Managed FOREX Savings Glut Export Promotion s Capital Flows ㅇ low interests ㅇ Asians buying U.S. finan/real Assets 9.11 Current Account Deficits (offsetting) Current Account Surplus External Liability Position Imbalance Current Account Imbalance 21