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International Economics -International Finance Wang Feng Department of International Economics and Trade School of Business Shenzhen University Email address: [email protected] 1 About the test 1.Comments on the exam of International trade Most of you (total 231) have done very well A+ : A: B: C: D: F: 16 49 67 54 28 17 (6.93%) (21.21%) (29%) (23.38%) (12.12%) (7.36%) 2 2.Arrangements of the test of international finance In-Class Performance 30% -Answer your name 20% -Voluntary participation 20% -Teamwork and presentation 60% Final Exam 70% 3 International trade versus international finance International trade: international microeconomics -From the perspective of individual nations -Concern about the relative price or physical side international finance: international macroeconomics -Analyze the behavior of the economy as a whole -Concern about the general price or monetary side 4 Macroeconomic analysis emphasizes four aspects of economic life 1. Unemployment 2. Saving 3. Trade imbalances 4. Money and the price level 5 Preview Chapter 13: Balance of Payments Chapter 14: Foreign Exchange Markets and Exchange Rates Chapter 15: Exchange Rate Determination Chapter 16: The Price Adjustment Mechanism with Flexible and Fixed Exchange Rates Chapter 17: The Income Adjustment Mechanism and Synthesis of Automatic Adjustments Chapter 18: Open-Economy Macroeconomics: Adjustment Policies Chapter 19: Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply Chapter 20: Flexible versus Fixed Exchange Rates, the European Monetary System, and Macroeconomic Policy Coordination Chapter 21: The International Monetary System: Past, Present, and Future6 National Income Accounts • Records the value of national income that results from production and expenditure. – Producers earn income from buyers who spend money on goods and services. – The amount of expenditure by buyers = the amount of income for sellers = the value of production. – National income is often defined to be the income earned by a nation’s factors of production. 7 National Income Accounts: GNP • Gross national product (GNP) is the value of all final goods and services produced by a nation’s factors of production in a given time period. • There are 4 types of expenditure: 1. Consumption: expenditure by domestic consumers 2. Investment: expenditure by firms on buildings & equipment 3. Government purchases: expenditure by governments on goods and services 4. Current account balance (exports minus imports): net expenditure by foreigners on domestic goods and services 8 • Another approximate measure of national income is gross domestic product (GDP): • Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period. • GDP = GNP – payments from foreign countries for factors of production + payments to foreign countries for factors of production 9 Figure1-1. U.S. GNP and Its Components in 2006 Source: U.S. Department of Commerce, Bureau of Economic Analysis 10 Figure1-2 China’s GDP growth:2003-2007 11 Figure1-3 Composition of China’s GDP:2007 12 GNP = Expenditure on a Country’s Goods and Services National income = value of domestic production Expenditure on domestic production Y = Cd + Id + Gd + EX = (C-Cf) + (I-If) + (G-Gf) + EX = C + I + G + EX – (Cf + If +Gf) = C + I + G + EX – IM = C + I + G + CA Expenditure by domestic individuals and institutions Net expenditure by foreign individuals and institutions 13 Expenditure and Production in an Open Economy CA = EX – IM = Y – (C + I + G ) • When production > domestic expenditure, exports > imports: current account > 0 and trade balance > 0 – when a country exports more than it imports, it earns more income from exports than it spends on imports – net foreign wealth is increasing 14 Figure 1-4: U.S. Current Account and Net Foreign Wealth, 1976–2006 Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007 release 15 Saving and the Current Account • National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G). Y–C–G (Y – C – T) + (T – G) Sp + Sg = S 16 How Is the Current Account Related to National Saving? CA = Y – (C + I + G ) implies CA = (Y – C – G ) – I = S – I current account = national saving – investment current account = net foreign investment • A country that imports more than it exports has low national saving relative to investment. 17 CA = S – I or I = S – CA • Countries can finance investment either by saving or by acquiring foreign funds equal to the current account deficit. – a current account deficit implies a financial asset inflow or negative net foreign investment. • When S > I, then CA > 0 so that net foreign investment and financial capital outflows for the domestic economy are positive. 18 CA = Sp + Sg – I = Sp – government deficit – I • Government deficit is negative government saving – equal to G – T • A high government deficit causes a negative current account balance when other factors remain constant. 19