International Trade, Fiscal and Monetary Policy: A Comparative Analysis, Slides of Macroeconomics

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Fiscal Policy

 Government Revenues

 Government Expenditures

 Government Borrowing

Monetary Policy

 Bank Rate

 Open Market operations

 Changes in Reserve ratio

 Credit Rationing

 Moral Learning

 Direct action

 Margin requirements

Basis for International Trade

 Trade takes place when it is in the interest of both parties

 See Page 168 – Adam Smith Observation, 1776

 Virtually all economists are “free trade” advocates

 If one nation has a production advantage in one good and another has a production advantage in a second good, the two should work out a trade agreement

Specialization & Exchange

 Specialization increases the potential for maximum production

 Productivity  Cost of Production Lowered  Total Production Increased  Every modern economy specializes

 Nations will export the goods & services they can produce efficiently (cheaper than other nations) and import the goods & services that other nations produce more efficiently

Differences in costs

 1. Equal Difference in costs

 2. Absolute difference in costs

 3. Comparative difference in costs

Balance of payments

 Visible goods and services

 Invisible goods

Presentation of balance of

Payments

 Current Account

 Capital Account

Trade Balances

 Positive Trade Balance – When a nation exports more $ value than it imports: $Exports > $Imports

 Negative Trade Balance – When a nation imports more $ value than it exports: $Exports < $Imports

Overallbalance on goodsand services

Balanceon goods

1970 1975 1980 1985 1990 1995 2000

Balanceon services

U.S. Balance of Trade in Goods, Services, and

Overall Balance, 1970-2000 (in billions of dollars)

Since the late 1980s, we have been running a large and growing balance on services. Our balance on goods, which has been negative since the mid-1970s, has grown steadily worse since 1991 and now totals more than $ billion

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Percentage of GDP

(^0 10 20 30 40 50 60 )

Netherlands Canada Sweden Switzerland Denmark Germany France United Kingdom Italy U.S.

Exports of Goods & Services as Percent-

age of GDP, Selected Countries, 1999

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World Trade Agreements & Free Trade

Zones

 Examples of Free Trade Agreements

 General Agreement on Trade and Tariffs (GATT) [1947]  World Trade Organization [1995]  European Union [1992]  North American Free Trade Agreement [1993]  Central American Free Trade Agreement [Pending?]

World Trade Agreements and Free Trade

Zones

 Examples of Free Trade Zones – Geographical areas where trade barriers have been eliminated or greatly reduced  NAFTA – Canada, U.S. and Mexico

• 200,000 U.S. mfg jobs to Mexico
• Modestly depressing impact on U.S. factory wages
• Increased trade deficits with both Canada and Mexico
• Mexico has become a manufacturing base – 60% of U.S. exports to Mexico are upgraded and returned to the U.S.
• Canada is our largest, single trading partner
• Existing tariffs are scheduled to be phased out over time

World Trade Agreements and Free Trade

Zones

 World Trade Organization [1995] as a successor to GATT

 Liberalization of Trade  Nondiscrimination – Most favored nation status defined

• Members must offer all other members granted status the same trade concessions  No unfair encouragement of exports
• Reductions of subsidies that encourage exports
• Been a major point of contention among all nations

Globalization: Arguments Against

 Upsets the status quo

 Workers in poorer countries exploited to provide cheaper goods for U.S.

 Most nations have a difficult time ceding their national sovereignty to an international organization