Chapter 10: Trade Balance and Financial Capital Flow Flashcards
Trade Balance
Any gap between a nation’s dollar value of its exports and imports
Trade Surplus
Trade exports exceed imports
Trade Deficit
Trade imports exceed exports
An exchange rate is nothing more than a _________ and can be analyzed with the tools of ________ and ________.
Price
Supply
Demand
Who is the US’s biggest trading partner, and how much?
Canada
Over $600 billion per year
What rank is the US in the world as an exporter?
2nd largest exporter in the world
What are the US’s main exports?
High tech goods (aircraft, pharmaceuticals, jet turbines, generators), intellectural goods (hollywood movies and music), and bulk goods (corn, oil, and cotton)
What is the benefit of international trade instead of producing everything on your own?
Focus on what you have a comparative advantage in, and make purchases from other countries that can make items cheaper. Better deal for the US to produce hollywood movies and jet turbines, and buy clothes from Asia.
NAFTA
North American Free Trade Agreement, established in 1994 to drop trade barriers between US/Canada/Mexico. Increased US trade deficits, decreased US manufacturing jobs. Decreased prices of all sorts of consumer goods, and created jobs in other industries.
Balance of Payments
Accounting record for a nation, that records all international transactions
- current account
- financial account
Current Account
Subaccount of the Balance of Payments. Records sale and purchase of goods and services, investment income earned abroad, and other transfers like donations/aid
Financial Account
Subaccount of the Balance of Payments. Records the purchase/sale of financial assets like stocks and bonds.
Merchandise Trade Balance
Tracking of solid/physical items transported between countries, as a measurement of trade balance (common a few decades ago)
Balance of Trade vs Current Account Balance
Balance of trade: imports and exports
Current Account Balance: imports, exports, income from investment and transfers
4 Components of Current Account Balance
Goods
Services
Income receipts/payments
Unilateral Transfers
Unilateral Transfers
Payments made by government, private charities, or individuals, in which money is sent abroad without any good/service being received
Income Payments
as a component of Current Account Balance
Money received by US financial investors on their foreign investments, and payments to foreign investors who had invested their funds here
If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?
The stock and bond values will not show up in the current account. However, the dividends from the stocks and the interest from the bonds show up as an import to income in the current account.
If the trade deficit of the United States increases, how is the current account balance affected?
It becomes more negative as imports, which are a negative to the current account, are growing faster than exports, which are a positive.
When did the US trade deficit start becoming significant?
About 1980, and it dropped again in mid-2000s
Are trade surpluses good or bad?
Can be either, depending on international flows of financial capital
Current Account Deficit
Country is a net borrower from abroad
n what way does comparing a country’s exports to GDP reflect how globalized it is?
GDP is a dollar value of all production of goods and services. Exports are produced domestically but shipped abroad. The percent ratio of exports to GDP gives us an idea of how important exports are to the national economy out of all goods and services produced. For example, exports represent only 14% of U.S. GDP, but 50% of Germany’s GDP
Why does the trade balance and the current account balance track so closely together over time?
The trade balance is the difference between exports and imports. The current account balance includes this number (whether it is a trade balance or a trade surplus), but also includes international flows of money from global investments.
National Savings of a Country is made up of…
Domestic savings by households and companies (private), government savings (public)
Two main sources for the supply of financial capital in the US
- Savings by individuals and firms (S)
2. Inflow of financial capital from foreign investors (M-X)
Two main sources of demand for financial capital in the US
- Private sector investment (I)
2. Government borrowing (G) less taxes collected (T)
National Savings and Investment Identity
algebraic expression
Supply of financial capital = Demand for financial capital
S + (M - X) = I + (G - T)
S
private Savings by individuals/firms
T
Tax revenue for the government
G
Government spending
I
Investment/spending from the private sector
M - X
Imports less Exports
G - T > 0
Indicates government spending is larger than tax revenue, so budget deficit exists and is a “demander” of financial capital (right side of National Savings and Investment Identity equation)
G - T < 0
Indicates government spending is less than tax revenue, so budget surplus exists and is a “supplier” of financial capital (left side of National Savings and Investment Identity equation)
A recession tends to make a trade deficit ________ or a trade surplus _________
Smaller
Larger
An economic upswing tends to make a trade deficit ________ or a trade surplus _________
Larger
Smaller
Trade Balance
X-M = S - I - G + T
Trade Deficit
M-X
Trade Surplus
X-M
Government Budget Surplus
T-G
Government Budget Deficit
G-T
If a country is running a government budget surplus, why is (T – G) on the left side of the saving-investment identity?
The government is saving rather than borrowing. The supply of savings, whether private or public, is on the left side of the identity.
What determines the size of a country’s trade deficit?
A trade deficit is determined by a country’s level of private and public savings and the amount of domestic investment.
If domestic investment increases, and there is no change in the amount of private and public saving, what must happen to the size of the trade deficit?
The trade deficit must increase. To put it another way, this increase in investment must be financed by an inflow of financial capital from abroad.
Why does a recession cause a trade deficit to decrease?
Incomes fall during a recession, and consumers buy fewer good, including imports.
Both the United States and global economies are booming. Will U.S. imports and/or exports increase?
A booming economy will increase the demand for goods in general, so import sales will increase. If our trading partners’ economies are doing well, they will buy more of our products and so U.S. exports will increase.
Level of Trade
Exports of goods and services as a share of its GDP. Tells you how much of its production it exports, measured as a % of GDP.
Is it possible to have a high level of trade, and a near-balance of trade?
yes
Low Level of Trade
Low amount of exports relative to total GDP
High Level of Trade
High amount of exports relative to total GDP
3 factors that strongly influence a nation’s Level of Trade
- Size of economy
- Geographic location
- History of trade
What is a more positive phrase for trade deficit?
“attracting foreign financial capital”
What is a more negative phrase for trade surplus?
“shipping financial capital abroad”
