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Welcome to
EC 382: International
Economics
By: Dr. Jacqueline Khorassani
Week Nine
1
Week Nine: Class 1



Tuesday, October 30
14:10-15:00
AC 202
I have newly graded assignments
here; please pick them up
2
What is antidumping law?


A law that does not allow an
international firm to sell its product in
an export market for less than it is sold
for in its home market.
Most countries have it
3
What is countervailing duty


A tariff imposed by a country that is
designed to increase the price of the
imported good by an amount equal
to any export subsidies.
Most nations have this too
4
Attention my dear students
You must know
everything in this Chapter on
GATT and WTO
5
Pay attention to Table 8.3:
Multilateral Trade Round
Dates
Tariff Cuts
# of Countries
Major Negotiation
Pre-GATT
1931-1947
33.2%
23
Tariffs
First Round
1947
21.1
23
Tariffs
Second Round
1949
1.9
13
Tariffs
Third Round
1950-1951
3.0
38
Tariffs
Fourth Round
1955-1956
3.5
26
Tariffs
Dillion Round
1961-1962
2.4
26
Tariffs
Kennedy Round
1964-1967
36.0
62
Tariffs, ag, and dumping
Tokyo Round
1974-1979
29.6
99
Tariffs and NTBs
Uruguay Round
1987-1994
38.0
125
Tariffs, services, agriculture
Millennium Round
1999
Aborted
Doha Round
2001-
142
See text for details
Source: Data adapted from R.P. Lavergne
6
Assignment




Due Class one, next Tuesday,
November 6
Needs to be typed
It has 20 points
You work on this alone
– No duplicates
– Duplicates receive zero marks
7
Question 1
Visit the WTO’s web page at wto.org to
answer the following questions:
a) Is Iran a member of WTO? How about
Iraq?
b) Which country is the newest member of
WTO?
c) Is the following statement true or false?
Explain. “WTO is for free trade at any
cost.”
d) Is the following statement true or false?
Explain. “The voting power of a nation that
is a member of WTO depends on its GDP.”
e) What was the size of the WTO’s budget last
year?
8
Question 2
Search the web (or elsewhere) for at least
Two examples of countervailing
and/or antidumping duties imposed
by Ireland or Europe in the recent
years. Name the products and their
exporting countries and the nature of the
imposed duties. Clearly list your sources.
9
CHAPTER 11
National Income Accounting
and the Balance of Payments
10
What is national income
accounting?


The process used to keep track of GDP
and its components.
What does GDP measure?
– A country’s total output per a unit of time
– A country’s total income per a unit of time
 Total
output measured in country’s
currency with goods/services measured
at market prices
11
What is excluded from GDP?
1.
Intermediate goods

Only final goods/services are included. Why?
–
2.
To avoid multiple counting
Non-reported market transactions and
activities


Informal economy
Shadow economy
– Mostly to avoid paying taxes or following other
regulations


Illegal goods
GDP is understated and provides a conservative estimate of
country’s total economic activity
12
What is the difference
between nominal and real
GDP?

Nominal GDP

– The value of GDP in current prices.
Real GDP
– The value of GDP in base year prices.

How do they relate to each other?
Real GDP in year t = (Nominal GDP in year t) * 100
(Price Index in year t)
13
What are the components of
GDP?
–
Y = C + I + G + (X - M)
Y = GDP (total production)= total income
C = Public’s consumption of goods and
services
I = private business firms’ investment in
equipment, software, structures, and
changes in business inventories, and
residential investment
G = The purchase of goods and services
(even investment goods) by government
X = Exports of goods and services
M = Imports of goods and services
14
Ireland’s Real GDP in
millions of €
(source: Central Statistics Office- Ireland)
175,000
170,000
165,000
160,000
155,000
150,000
145,000
140,000
135,000
130,000
Real GDP
http://www.cso.ie
2003
2004
2005
2006
15
International Economics

Week Nine- Class 2
– Wednesday, October 31
– 11:10-12:00
– Tyndall
16
Don’t forget the
Assignment




Due Class one, next Tuesday,
November 6
Needs to be typed
It has 20 points
You work on this alone
– No duplicates
– Duplicates receive zero marks
17
Question 1
Visit the WTO’s web page at wto.org to
answer the following questions:
a) Is Iran a member of WTO? How about
Iraq?
b) Which country is the newest member of
WTO?
c) Is the following statement true or false?
Explain. “WTO is for free trade at any
cost.”
d) Is the following statement true or false?
Explain. “The voting power of a nation that
is a member of WTO depends on its GDP.”
e) What was the size of the WTO’s budget last
year?
18
Question 2
Search the web (or elsewhere) for at least
Two examples of countervailing
and/or antidumping duties imposed
by Ireland or Europe in the recent
years. Name the products and their
exporting countries and the nature of the
imposed duties. Clearly list your sources.
19
Are second hand sales in
GDP?


No
GDP measures the value of newly
produced goods and services only.
20
Irish Nominal GDP
components in 2006
(millions of €)
(source: Central Statistics Office- Ireland)
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
East
G
C
I
X-M
21
Flow/Stock Variables

Stock: Is measured
at a given point in
time

Flow: Is measured
per unit of time
22
What are these variables,
flow or stock?




GDP
Price index
Exports
Unemployment rate
23
What is X-M equal to?




X-M is net exports or the trade balance
= exports of goods and services minus
imports of goods and services
Y + C + G + I + (X-M)
X-M = Y – (C + I + G)
Trade Balance = domestic production
(supply) – domestic expenditures
(demand)
24
If Y< (C+I+G)  X<M 
Trade deficit


Our income (production, supply) is less
than our expenditures (demand) or we
produce less than we consume domestically
We are borrowing from foreigners
– flow or stock?

Our international indebtedness increases
– flow or stock?
25
This means that in the
future


Deficits must be paid by producing
more than consuming (exporting
future consumption).
Trade deficit is the process of
importing present consumption and
exporting future consumption.
26
If Y> (C+I+G) X>M
Trade surplus


Our income (production) is more than
our expenditures or we produce more
than we consume domestically
We are lending to foreigners
– flow or stock?

Our international indebtedness
decreases
– flow or stock?
27
This means that in the
future

our domestic production will be less
than our expenditures  importing
future consumption.
28


Trade imbalances denote a country’s
preference for present versus future
consumption
Intertemporal Trade
– Countries trading production for
consumption at different points in
time.
29
Production and Income

We know that
– GDP = C + I + G + (X-M) = Y

We also know that
–Y=T+C+S

This means that
–C+I+G+X-M=T+C+S
–I+G+X–M=T+S
–I+G+X=T+S+M
30
Injections and leakages



I+G+X=T+S+M
The left side items are all expenditures on
domestic output  create income in the
country  injections in the income stream
The right side items are all monies not spent
on domestic output don’t create income
in the country leakages from the income
stream
31
Trade balance, private
saving, government saving
and business investment




I+G+X=T+S+M
(X – M) = (T- G) + (S – I)
Trade balance = government saving +
(private saving – business investment)
What causes the trade deficit?
– Budget deficit?
– Low amount of saving relative to
investment?
32
How could we reduce trade deficit?
(X – M) = (T- G) + (S – I)

4 strategies to reduce trade imbalance:
1)
2)
3)
4)
Increasing the level of savings to reduce the
trade deficit
Reduce the level of investment
Increase taxes
Reduce government spending
33
International Economics

Week Nine- Class 3
– Wednesday, October 31
– 15:10-16:00
– AC 201
34
Don’t forget the
Assignment




Due Class one, next Tuesday,
November 6
Needs to be typed
It has 20 points
You work on this alone
– No duplicates
– Duplicates receive zero marks
35
Question 1
Visit the WTO’s web page at wto.org to
answer the following questions:
a) Is Iran a member of WTO? How about
Iraq?
b) Which country is the newest member of
WTO?
c) Is the following statement true or false?
Explain. “WTO is for free trade at any
cost.”
d) Is the following statement true or false?
Explain. “The voting power of a nation that
is a member of WTO depends on its GDP.”
e) What was the size of the WTO’s budget last
year?
36
Question 2
Search the web (or elsewhere) for at least
Two examples of countervailing
and/or antidumping duties imposed
by Ireland or Europe in the recent
years. Name the products and their
exporting countries and the nature of the
imposed duties. Clearly list your sources.
37
What is the balance of
payments account?


A summary of all the international
transactions of a country’s residents with
the rest of the world during a year.
Composed of different accounts
38
In general


Any transaction resulting in money (€)
flowing into a country is a credit and
has a positive sign
Any transaction resulting in money (€)
flowing out of the country is a debit
and has a negative sign
39
Goods & Services Balance
Merchandise Balance
1.

2.
Exports of goods – imports of goods
Balance on Goods & Services
 Merchandise Balance + export of
services – import of services
40
Current Account Balance


Balance on goods and services
+ income received from
investments abroad – income
paid to foreigners on their
investments in the country +
unilateral transfers received –
unilateral transfers sent abroad.
Unilateral Transfers:
– Grants or gifts extended to or
received from other countries
41
Ireland Current Account
Balance (millions of €)
2005
2006
Merchandise
+28,218
+25, 389
Goods and
Services
Current
Account
Balance
+18,915
+17,970
-5,690
-7,276
42
Examples of Capital Account
(financial assets, non-financial
assets, official reserves) Items
1.
2.
Irish resident buys shares of US stock
(financial asset)
 Money leaves country  domestic
holdings of foreign assets goes up
debit  negative sign
American buys a right to produce
something in Ireland (franchise, non
financial asset)

3.
Money enters the country foreign holdings of
domestic assets goes up  credit positive sign
Irish government sells dollars (official
reserve)
 Money (€) enters the country 
Domestic holding of foreign assets goes
down  credit  positive sign
43
The Capital Account Balance

Net increase in foreign holdings
of domestic assets - Net
increase in domestic holdings of
foreign assets
44
The Balance of
Payments (BOP)


BOP = Current account balance+
capital account balance + statistical
discrepancy = 0
Why?
45
Why is the balance of payments
zero?

Example
–
–
–
–
2 countries: US & Ireland
US has no €; Ireland has no $
US buys Irish sweater for $1000
US Current account balance = ?

-$1000
– US pays $1000 to Irish exporter or US
gives and IOU (a $1000 bond) to Irish
Exporter
– Is this a capital inflow or capital
outflow?

Inflow
– US Capital account balance = ?

+$1000
46
ICA 5: Find (1) merchandise balance, (2) goods and services
balance, (3) current account balance, (4) capital account
balance and (5) statistical discrepancy in Ireland
1.
2.
3.
4.
5.
6.
7.
Ireland exports €50 worth of shoes
A German tourist gets a hair cut in Galway
(€30)
Ireland imports €100 worth of TVs
Irish government sends €10 worth of aid to
Afghanistan
A Japanese buys €90 Irish government
bond
An Irish tourist goes to movies in Germany
(€15)
An Irish buys a €55 German bond.
47