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Applied Macroeconomics Import : The purchase of goods and services from abroad . Export : The sale of home goods and services abroad . Re-Export : To export again what has been imported. trade balance : A country's exports minus its imports ,the largest component of a country's balance of payment. also called balance of trade . balance of payments : An accounting document that record all the flows of money in and out of a country during one year . Thanks to the balance of payment we can see if more money is flowing into a country or more money is flowing out of a country, and give us an indication of the competiveness of that country . The balance of payment is spilt between two account the Current account and the Capital account . So the flow of money in and out of the country is either recorded in the current account or the capital account . The Balance of Payment ( BOP ) Current Account + Capital and Financial account = 0 Current Account = - Capital and Financial account Current Account surplus ( or deficit ) = Capital and Financial account deficit ( or surplus ) ( X - M ) = KO – Ki The Capital Account: an account that record the flow of money as result of public and private international investments flowing in and out of a country, which includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies. The Current account : An account made of four components : it records flows of money as result of : The current account Trade in goods Inflow ( + ) Outflow ( - ) Visible trade Trade in services Inflow ( + ) Outflow ( - ) Invisible trade Profits and Income Credit ( + ) Debit ( - ) Invisible trade Current Transfers Credit ( + ) Debit ( - ) Invisible trade Each components could be negative and could be positive, If we combine these elements and have a current account deficit that’s indicate that more money is going out of a country than its going in, and generally this is considered to be BAD NEWS. Because this implies that we are NOT competitive and implies that we MUST be borrowing money to finance our over spending . We Usually measure the Current account as a percentage of the GDP or GNP . Gross Domestic Product (GDP) : is the total value of final goods and services produced within a country's borders in a year. GDP = C + I + G + (X - M) Gross National Product (GNP) : is the total value of final goods and services produced in a year by domestically owned factors of production. GNP = C + I + G + (X - M) + NR C=Personal consumption expenditures I=Gross private domestic investment G=Government consumption expenditures X=Net exports of goods and services M=Net imports of goods and services NR=Net income from assets abroad 1 Balance Of Trade : The difference between the value of the total exports and the value of total imports of a nation during a specific period of time. The nominal value of exports equals the price index of exports times the volume of exports . X=Px.Xvolume (export in nominal terms) The nominal value of Imports equals the price index of Imports times the volume of imports . M=Pm. mvolume (export in nominal terms) This means the balance of trade is: BT = Px.Xvolume - Pm.mvolume (balance of trade) If we divided through by a price index such as the price of the import we obtain: BT = PM[(PX/PM)X - M] (balance of trade In real terms) The balance of trade depends not only on the physical quantities of exports and imports, X and M, but also on the price of exports divided by the price of imports. This ratio is known as the Terms Of Trade ( TOT ) . Terms Of Trade ( TOT ) : is the Relationship between the prices at which a country sells its exports and the prices paid for its imports. TOT = PX/PM BT = PM[ ( PX/PM)X - M] If the Terms Of Trade fall, for example, exports become cheaper relative to imports this mean that more goods and services have to be exported to pay for a given volume of import , the country is said to have "deterioration in its Terms Of Trade “ and a decline in the trade balance . Conversely, If a country's export prices rise relative to import prices, its terms of trade are said to have moved in a favorable direction or improving, since it now receives more imports for each unit of goods exported, and will lead to an improvement in the trade balance . BT = PM[ (PX/ PM)X - M] 2 What affects our demand for foreign goods and services and the demand from the rest of the world for our products? The main factor determining the level of exports and imports is the competitiveness of UK producers compared with producers in other countries. Now , What is the best measure of competitiveness?? Price competitiveness: The most straightforward measures of competitiveness. θ = (p. of foreign goods expressed in home currency)/(p. of home goods) θ = P*.e/P (price competitiveness, real exchange rate) P* is the foreign price level, P is the UK price and e is the nominal exchange rate measured in number of home currency per unit of foreign currency . e = (no. of units of home currency)/(one unit of foreign currency) e = ₤/€ (nominal exchange rate) Defining e= ₤/€ as the domestic currency units for a foreign currency unit this is only one convention the other convention is used as well as foreign currency units for a domestic currency unit . e= €/₤ is the Two relative measures of competitiveness are : Relative producer prices (RPP) : RPP = WP*.e/WP It’s the ratio of foreign to UK wholesale prices. Relative export prices ( REP ) : RPP = Px*.e/Px It’s the ratio of foreign to UK export prices. RPP = P*.e/Px or RPP = P*.e /WP Relative profitability of exporting (RPE): RPE= Px/WP – This is the ratio of export prices to domestic prices or the wholesale price index. – This is not a measure of international competitiveness, but it is useful because it shows the extent to which changes in export prices reflect changes in the profit margins on exports against home sales. e= ₤/€ Px RPE= Px/WP Relative unit labor costs (RULC) : Unit labor costs in the UK are given by : ULC = WL/Y = W/y where W is the wage rate , L is labor employed, Y is output and y is domistic output per unit of labor input (Y/L). foreign Unit labor costs in the rest of the world : ULC* = e.W*L*/Y* = eW*/y* W* is the rest of the world’s wage rate, e is nominal exchange rate , L* is foreign labor employed, Y * is foreign output and y* is foreign output per unit of foreign labor input (Y*/L*). If we take the ratio of foreign to UK unit labor costs we obtain the relative unit labour costs (RULC): RULC = ULC*/ULC = (e)(W*/W)(y*/y) RULC thus depends on three things: the exchange rate (e). relative wage rates (W*/W). relative productivity levels (y*/y). A raise in the RULC indicate a rise in the foreign costs relative to the UK costs , i.e. an improvement in the UK competiveness or a real depreciation in the RULC and a fall of the RULC is a real appreciation and a fall in the UK competiveness. A second way to measure RULC is what referred to as normalized relative unit labour costs- RULC (N). (RPP) Relative producer prices. ( REP ) Relative export prices. (RPE) Relative profitability of exporting. (IPC) Import price competiveness (RULC-N) Normalized relative unit labor costs. 3 Exports Function : Exports are the demand by the rest of the world for UK production . a variable that measure world demand : - world GDP ( Y*) . - world trade ( total world exports ). a variable that measure Competitiveness : (RULC-N ) normalized relative unit labor costs. If we estimate a simple export equation we obtain the following: Xt = 0.05WXt-1 - 0.29RULCt-1 + 40.2 where X is exports , WX is the world exports and RULC is relative unit labor costs . It implies that the ‘world trade’ elasticity of demand for exports is 0.84, that a 1 per cent increase in world trade is associated with a rise of less than 1 per cent in UK exports. This is consistent with the UK’s share of world exports having fallen progressively over time as world trade has expanded. It suggests a low ‘price’ elasticity of demand, of around 0.35 . Imports Function: Imports are the demand by the UK for rest of the world production. a variables that measure domestic demand : - total final expenditure (TFE) = C + I + G + X where C is consumption, I is investment, G is government expenditure and X is exports. - excess capacity The justification for this is that when the economy is being run at a relatively high level of demand , businesses will turn to imports because the goods they want are unavailable at home. a variable that measure Competitiveness: - (RULC-N ) normalized relative unit labor costs. If we estimate a simple import function we obtain the following: Mt = 0.34TFEt-1 + 0.39RULCt-2 - 0.55XSCt - 78.7 M is imports , XSC is the measure of excess capacity , TFE total final expenditure and RULC is the competitiveness measure . The income elasticity of demand of about 1.5 . Imports appear to be less responsive to relative unit labour costs than are exports, a change in RULC takes 2 years to affect imports, but only one year to affect exports. if excess capacity falls by £ 1 billion, imports rise by £ 0.55 billion. This means that if output rises without any rise in capacity the effective marginal propensity to import is much higher than 0.34. An alternative way of specifying this equation is to have the marginal propensity to import depending on competitiveness. If we estimate such an equation we obtain: Mt = aTFEt-1 - 0.57XSCt - 43.9 where a = 0.25 + 0.001RULCt-2 This is the type of import function used in some macroeconomic models , It is easy to check that it gives income and price elasticity that are very similar to those given by the simpler import function described above. UK imports have grown more quickly than UK demand (the high income elasticity). UK exports have grown more slowly than world trade (the low income elasticity). Britain’s balance of payments problems , has been the high level of imports . the reason for this can be found in the income elasticities contained in the export and import functions we have just considered. if the income elasticity of demand for imports is high and the income elasticity of demand for exports is low, then if the UK grows at the same rate as the rest of the world imports will grow faster than exports. UK exports have grown more quickly than UK output. It is possible that exports rise more quickly than output simply because of increasing specialization . If the trade balance is to remain constant on average a high growth of exports must lead to a high growth of imports. In this case a high level of import to GDP may be nothing to be concerned about. The evidence also suggests that competitiveness has a significant effect on both exports and imports, with exports responding more quickly and more strongly. Given the importance of exports and imports in the UK economy (in 1988 exports were 28 per cent and imports 32 per cent of GDP) together with significant price elasticities of demand it can be argued that the exchange rate, which affects competitiveness, is a key variable in regulating the level of aggregate demand. 25000 Kuwait ( Xport - Import ) X 20000 M 15000 10000 5000 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Tradr Balance 15000 X-m 10000 5000 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -5000 -10000 1.8 GNP% Kuwait ( Export - Import ) X 1.6 M 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 GNP% 1.0 X-m 0.5 0.0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -0.5 X-m -1.0 -1.5 -2.0 60000 2006 2005 2004 2003 2002 2000 2001 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1986 1987 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 -10000 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 1983 1981 1979 1977 1975 (1.00) 2007 (4.00) CURRENT ACCOUNT 30000 CURRENT ACCOUNT (3.00) Trade Balance 50000 Trade Balance 40000 20000 10000 0 -20000 -30000 -40000 GNP% 3.00 2.00 1.00 - (2.00) (5.00) (6.00) (7.00) 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 1978 1977 1976 1975 CURRENT ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT NET ERRORS AND OMISSIONS OVERALL BALANCE 60000 CURRENT ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT NET ERRORS AND OMISSIONS OVERALL BALANCE 40000 20000 0 -20000 -40000 -60000 10.00 GNP% 8.00 6.00 4.00 2.00 - (2.00) (4.00) (6.00) (8.00) Kuwait Balance of Payment ( 1975 – 2007 ) balance of payments 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 GOODS EXPORTS: F.O.B. 8485 9621 9562 10234 18114 20633 16023 10819 11473 12156 10374 7216 8221 7709 11396 6989 1080 6548 10264 11284 12833 14946 14281 9618 12224 19478 16237 15367 21795 30089 46971 58638 63681 GOODS IMPORTS: F.O.B 2400- 3300- 4735- 4326- 4870- 6756- 6736- 7811- 6889- 6549- 5719- 5265- 4938- 5999- 6410- 3810- 5073- 7237- 6940- 6600- 7254- 7949- 7747- 7714- 6708- 6451- 7047- 8117- 9880- 11663- 14238- 14331- 20625- SERVICES: CREDIT 521 612 625 702 1183 1225 1392 SERVICES: DEBIT 759- 975- 1406- 1854- 2265- 3067- 2905- 3491- 3620- 3705- 4086- 3861- 4077- 4204- 4119- 3359- 5090- 4590- 4589- 4531- 5360- 5072- 5129- 5546- 5172- 4921- 5355- 5838- 6615- 7586- 8604- 10215- 13082- TRADE BALANCE 5848 5958 4044 4755 12161 12035 7773 INCOME: CREDIT 1283 1631 1965 2901 3575 5487 8325 6780 5712 5854 5330 8352 6129 7863 9211 8584 6093 5907 4489 4174 6125 6409 7744 7163 6094 7315 5427 3716 3733 6584 9413 14667 15688 INCOME: DEBIT 131- 123- 199- 294- 416- 640- 739- 941 458 754- 868 888 1137 1053 1030 1158 1345 1279 1832 2790 1706 857- 683- 838- 237 665- 613- 545- 992 1494 1242 1415 1382 1492 1760 1766 1561 1823 1664 1648 3144 1337- 2213 1099 8091- 3786- 606- 793- 846- 682- 662- 17 CURRENT TRANSFERS : CREDIT 23- 4723 7931 9636 1569 1601 3417 3165 1877- 1905 9929 5499 3059 8443 14583 28852 42023 39610 663- 1004- 1244- 1229- 1467- 1296- 985- 109 3743 94 54 53 79 98 99 616- 524- 369- 372- 456- 556- 85 53 50 66 88 86 1499- 2751- 113 127 CURRENT TRANSFERS: DEBIT 1069- 537- 1249- 1232- 1288- 1580- 1661- 1521- 1551- 1378- 1573- 1266- 1260- 1319- 1494- 4951- 23798- 1927- 1415- 1590- 1518- 1543- 1586- 1874- 2102- 2041- 2132- 2192- 2446- 2638- 3487- 3733- 5203- CURRENT ACCOUNT, N.I.E. 5930 6929 4561 6130 14032 15302 13699 4963 5311 6428 4798 5616 4561 4602 9136 3886 26479- 450- 2499 3243 5017 7107 7935 2215 5010 14672 8324 4265 9424 18162 34308 51571 47471 3 CAPITAL ACCOUNT: CREDIT 115 289 716 2236 2950 1707 1463 40- 27- 34- 23- 433 797 882 1573 194- 207- 211- 210- 13- CAPITAL ACCOUNT, N.I.E. 205- 205- 194- 204- 96- 703 FINANCIAL ACCOUNT, N.I.E. 6648- 8752- 4030- 5148- 9929- 11306- 8300- 3032- 124 7451- 2334- 7505- 5566- 7340- 8323- 413 38766 11067 421 3304 157 7632- 6211- 2920- 5706- 13779- 5478- 5038- 12106- 16836- 31087- 47962- 37285- NET ERRORS AND OMISSIONS 1032 2070 412 1424- 3737- 2950- 5116- OVERALL BALANCE 315 247 943 443- 366 1045 283 1975 1002 117 545 810 462 5196- 11012- 8765- 4192- 6292- 5119- 705 1621- 886 83- 1847- 1928- 1275 897- 1276 1851 1478- 50 139- 24- 7 259 32- 1596 205- 4432- 1140 1919- 1806 842- 35- 916 205- 44 18- 824 CAPITAL ACCOUNT: DEBIT 79 20- 474 2217 2931 1672 1431 912 842- 2869- 1869- 574- 918 2268 2908 970- 1824- 1130- 3398- 629 619 907- 8541- 3583 3218 Exports Function : Xt = α + β1y*t-1 + β2 θ t-1 X is exports , y* world GDP and θ is the competitiveness measure . Xt = -106.85 + 50.11 y*t-1 + 0.01 θ t-1 In Log : Xt = -0.76 + 2,43 y*t-1 + 0.43 θ t-1 SUMMARY OUTPUT Regression Statistics Multiple R 0.81427624 R Square 0.663045794 Adjusted R Square 0.636089458 Standard Error 24.76938071 28 Observations ANOVA df SS MS F Regression 2 30181.64794 15090.82397 24.5970292 Residual 25 15338.05551 613.5222206 Total 27 45519.70346 Coefficients Standard Error Intercept 106.8567776- t Stat P-value Significance F 1.24347E-06 Lower 95% Upper 95% Lower 95.0% Upper 95.0% 43.02725006 2.48346751- 0.020073568 195.4730571- 18.24049799- 195.4730571- 18.24049799- X Variable 1 50.11549588 14.86670744 3.370988236 0.002436492 19.49693901 80.73405274 19.49693901 80.73405274 X Variable 2 0.008570657 0.001222155 7.012742633 2.37575E-07 0.006053582 0.011087731 0.006053582 0.011087731 SUMMARY OUTPUT Regression Statistics Multiple R 0.633109776 R Square 0.400827989 Adjusted R Square 0.352894228 Standard Error 0.222933237 28 Observations ANOVA df Regression SS 2 MS F Significance F 0.831182089 0.415591045 8.362122676 0.001657273 Residual 25 1.242480709 0.049699228 Total 27 2.073662799 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 0.76234262- 0.667076039 1.142812175- 0.263943259 2.136211429- 0.61152619 2.136211429- X Variable 1 2.429392953 0.923815162 2.629739209 X Variable 2 0.433106658 0.106410469 4.070150822 0.000413682 0.213950196 0.65226312 0.213950196 0.61152619 0.01441138 0.526760027 4.332025879 0.526760027 4.332025879 0.65226312 Imports Function : Mt = α + β1yt-1 - β2 θ t-2 M is imports , y Domestic GDP and θ is the competitiveness measure . Mt = 23.88 + 0.13 yt-1 – 2.61 θ t-2 With Log : Mt = 1.48 + 0.09 yt-1 – 0.1 θ t-2 SUMMARY OUTPUT Regression Statistics Multiple R 0.323294511 R Square 0.104519341 Adjusted R Square 0.026651458 Standard Error 14.16492344 Observations 26 ANOVA df SS MS F Significance F Regression 2 538.6377064 269.3188532 1.342265085 0.280961244 Residual 23 4614.836289 200.6450561 Total 25 5153.473996 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 32.87902494 26.57052891 1.237424556 0.228414284 22.0863016- 87.84435147 22.0863016- 87.84435147 X Variable 1 2.611426631 8.911393426 0.29304358 0.772116505 15.82319509- 21.04604836 15.82319509- 21.04604836 X Variable 2 0.130982606 0.086015777 1.522774193 0.141447034 0.046954586- 0.308919797 0.046954586- 0.308919797 SUMMARY OUTPUT Regression Statistics Multiple R 0.277453491 R Square 0.076980439 Adjusted R Square 0.003282131Standard Error 0.111967308 26 Observations ANOVA df Regression SS 2 MS F Significance F 0.024048046 0.012024023 0.959107576 0.398038796 Residual 23 0.288343597 0.012536678 Total 25 0.312391643 Coefficients Standard Error 1.478339789 0.271653782 5.441999656 1.56887E-05 0.916381129 2.04029845 0.916381129 2.04029845 X Variable 1 0.08529403 0.067884813 1.256452305 0.221564168 0.055136405- 0.225724465 0.055136405- 0.225724465 X Variable 2 0.095068452 0.469675099 0.202413226 0.841373493 0.876528511- 1.066665416 0.876528511- 1.066665416 Intercept t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0% Thanks for listening