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April 04, 2012 |
III. Open Economy Macroeconomics
The microeconomy focuses on trade: individual
products--which ones to export and import
The macroeconomy focuses on investment: the economy in its entirety
What we saw during
markets and the global economy: how net foreign investment happens--via a
country's CAB
Focus now: how government macroeconomic policies
can affect
investment
A. International transactions
2 categories of internationally
traded items:
(1) current account
(CA): goods and
services
Goods: tangible items
Services: intangibles: tourism, financial services, income on
investments and loans
Also, in the real world: Transfer payments (gifts and aid)
Subtotal of all
international transactions in
goods, services, income and transfer payments = the current account balance (CAB).
CAB reflects the economy's income and expense transactions
(2) foreign investments (NFI
= net foreign investment)
Loans and investments: money, stocks, bonds.
Includes official reserve
transactions by central banks
Subtotal of all transactions in financial assets = NFI
CAB
= NFI our most
accurate measure of change in the economy's "net external position" during a year
Thus, we can look at our current account and see whether our nation has
acquired international wealth holdings on balance or not during the year
Lenders: CAB and NFI > 0
Borrowers: CAB and NFI < 0
application: International investment and transactions: the US
The link between international transactions and the macroeconomy:
| Recall: | C + I + G + NX | = | Y | |||
| => | NX | = | Y | - | (C+I+G) | |
|
domestic production |
- |
domestic spending |
||||
Lenders: Y > (C+I+G): domestic production
exceeds domestic spending
Borrowers: Y < (C+I+G): domestic spending exceeds domestic production
Calculating international transactions (I/T) balances
See International investment and transactions: the US worksheet
US: CAB deficits => net borrower.
Often thought that a CA surplus is good,
deficit is bad, but a CA surplus has several disadvantages:
Signals lack of profitable domestic investment opportunities
More difficult to tax FDI than domestic investment
May be hard to collect the foreign payments in the future
May spark protectionism from trading partners
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CABs, 2010: 190 countries |
||||||||
| Biggest lenders | Biggest borrowers | |||||||
| By dollars | $B | %oGDP | By dollars | $B | %oGDP | |||
| $ | rank | % | $ | rank | % | |||
| China | +270 | 1 | 5.2% | United States | -471 | 1 | 3.3% | |
| Japan | +196 | 2 | 3.6% | Italy | -72.0 | 2 | 3.5% | |
| Germany | +188 | 3 | 5.7% | United Kingdom | -71.6 | 3 | 3.2% | |
| By %GDP | $B | %oGDP | By %GDP | $B | %oGDP | |||
| $ | % | rank | $ | % | ||||
| Macao | +12 | 44% | 1 | Liberia | 0.4 | 42% | ||
| Azerbaijan | +15 | 29% | 2 | Lebanon | 9.4 | 24% | ||
| Singapore | +50 | 24% | 3 | Sierra Leone | 0.3 | 17% | ||
China accounted for
22% of total external lending
US accounted for
40% of total external borrowing
Historical giant lender: Great Britain: CA surplus averaged 5.2% of GNP from 1870-1914
International investment position
(US-owned foreign assets - Foreign-owned US assets)
See International investment and transactions: the US -- bottom table
1981: US = #1 net
creditor nation
Share of reported global total for net lending: 72%
2010: US = #1 net debtor nation
Share of reported global total for net borrowing:
40%
| Number of years... | 1946-1981 | 1982-2011 |
| CAB > 0 | 29 | 1 (1991) |
| CAB < 0 | 7 | 29 |