The International Trade and Capital Flows Chapter 23

Chapter Outline Measuring Trade Balances Trade Balances in Historical and International Context Trade Balances and Flows of Financial Capital The National Saving and Investment Identity The Pros and Cons of Trade Deficits and Surpluses The Difference between Level of Trade and the Trade Balance

Figure 23.2 The current account balance and the merchandise trade balance in billions of dollars from 1960 to 2012. If the lines are above zero dollars, the United States was running a positive trade balance and current account balance. If the lines fall below zero dollars, the United States is running a trade deficit and a deficit in its current account balance. These same items—trade balance and current account balance—are shown in relationship to the size of the U.S. economy, or GDP, from 1960 to 2012.

International Flow of Investments & Capital

International Flow of Investment & Capital The top portion tracks the flow of exports and imports and the payments for those. The bottom portion tracks international financial investments and the outflow and inflow of monies from those investments. These investments can include investments in stocks and bonds or real estate abroad, as well as international borrowing and lending.

International flow of investments & capital Each element of the current account balance involves a flow of financial payments between countries. The top line shows exports of goods and services leaving the home country; The second line shows the money received by the home country for those exports. The third line shows imports received by the home country; The fourth line shows the payments sent abroad by the home country in exchange for these imports.

Determinants of trade and current account balances national saving and investment identity provides a useful way to understand the determinants of the trade and current account balance Supply of financial capital = Demand for financial capital S + (M – X) = I + (G - T) S = private savings; M = imports; X = exports; I = investment; G = government expenditure; T = taxes Trade defici = Domestic investment – Private domestic savings – Government savings (M – X) = I – S - (T - G)

Pros and cons of Trade Deficits and Surpluses Makes economic sense for a nation to borrow from abroad, as long as the money is wisely invested in ways that will tend to raise the nation’s economic growth over time United States (1831 – 75) - a trade deficit in 40 of those 45 years (importing capital) Invested in projects like railroads that brought a substantial economic payoff South Korea (1970s) – trade deficit; mid ‘80s – ’90s trade surplus, after economy grew

Pros and Cons Large economies in Latin America borrowed heavily during ‘70s, no resulting increase in productivity; trouble paying back during ‘80s Similar issues with African countries During ‘90s in East Asia – capital flight late ‘90s (after inflow during early ’90s)

Level of trade and trade balance level of trade — measured by exports of goods and services as a share of GDP “How much of production is exported?” Factors influencing level of trade: Size of economy Geographic location History of trade Balance of trade separate from level of trade

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