1 A Bird Eye View of the Current World Economy : Trade and Finance J.D. Han King’s University College at UWO Eco 370ppp #1

2 Growth Lack of Investment Managed FOREX Consumption Rises; Savings lags Government Budget Deficits rises Current Account Deficits Export Promotions Savings Glut Capital Flows ㅇ low interests ㅇ Asians buying U.S. finan/real Assets External Liability Position Imbalance Current Account Imbalance Current Account Surplus (U.S.)(Asia, etc.) (offsetting) 1. Current Fundamentals of World Economy 9.11

3 2. Flows of Goods U.S. is a voracious absorber of world products particularly from the East Asia U.S. Trade Decifits (Import in excess of Exports) has been the largest and increasing rapidly while the East Asian countries have been accumulating Trade Surplus with U.S. - International Currencies(monies) flow to the East Asia The East Asia is becoming the ‘Factory of the World’

n U.S.-1,607-1,409-6,681 n EU 15 Countries n Japan ,721 n Asia 7 Countries 1) ,678 (China) (Taiwan) (Korean) n Latin America n Middle East OPEC Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and Indonesia Data : IFS, Bloomberg (100 Million $) World: Current Account Trends of Major Countries

5 Note : 1) ( ) has the share in the world Sources : IFS, Bloomberg Largest Deficits -2,254(84.5) 10 Lagest Deficits -8,719(92.9) n U.S. -1,607(60.2) n U.S. -6,681(71.2) n Canada -134(5.0) n Spain -492(5.2) n U.K. -126(4.7) n U.K. -419(4.5) n Saudi Arabia -98(3.7) n Australia -400(4.3) n Australia -80(3.0) n Turkey -155(1.7) n India -52(1.9) n Italy -151(1.6) n France -44(1.7) n Greece -131(1.4) n Argentina -42(1.6) n Portugal -127(1.4) n Norway -41(1.5) n Hungary -88(0.9) n Denmark -30(1.1) n Mexico -74(0.8) (100 million U.S. $; %) World: Current Account Deficits

6 Note : 1) ( )has the share in the world Data : IFS, Bloomberg countries 1,862(96.6) 10 countries 6,343(73.6) n Japan 844(43.7) n Japan 1,721(20.0) n Germany 469(24.3) n Germany 1,034(12.0) n Taiwan 180(9.3) n China 687(8.0) n Korea 101(5.2) n Swiss 602(7.0) n Swiss 63(3.3) n Russia 599(7.0) n South Africa 51(2.6) n Saudi Arabia 315(6.0) n Kuwait 46(2.4) n Norway 344(4.0) n Mexico 42(2.2) n Sweden 285(3.3) n Netherlands 42(2.2) n Singapore 279(3.2) n Malaysia 26(1.3) n Korea 276(3.2) (100 million $, %) World: Current Account Surplus

7 Current Account Trends of U.S.: ‘Ever Increasing’

EU 15 countries 10( 0.9)167( 9.2)1,045(16.0) (Germany) 80( 7.3)186(10.2)459( 7.0) Japan 490(44.7)557(30.5)752(11.5) Asian 7Countries 333(30.4)795(43.5)2,270(34.8) (China) 62( 5.6)497(27.2)1,620(24.9) (Taiwan) 130(11.9)122( 6.7)129( 2.0) (Korea) 63( 5.7)-19(-1.0)198( 3.0) Latin America 92( 8.4)64( 3.5)841(12.9) Middle East OPEC 43( 3.9)-2(-0.1)221( 3.4) Others 128(11.7)245(13.4)1,387(21.3) (Canada) 99( 9.1)179( 9.8)668(10.3) Total 1,096(100.0)1,826(100.0)6,517(100.0) Note : 1) minus (-) indicates the U.S.’s surplus Data : U.S. Government (100 mil. $, %) U.S.: Trade Deficits with

9 Making a Sense in the Context of Macroeconomics National Income Accounting: Savings, Investment and Trade: U.S. and Major Partners Blue- Saving Red – Investment Orange – Current Account Observation: 1)Current account Deficits and Investment are + vely corrleated. Current account Surplus and Investment are –vely correlated.. 2)Current account Deficits and Savings are –vely correlated. Current account Surplus and Savings are +vely correlated.

Let’s think about: 1. What will be the limit to the U.S. trade deficit? 2. How come the US can increase the trade deficits so much without any constraint? 3. How come this flow of funds and the shifting of production(=income generation) from the U.S. to East Asia does not decrease the National Income of the U.S.? 4. Is there any interconnection between X-M, and S and I? 5. What about the causation in the above relationship? Which causes which? 10

For above Question3: What is happening to the component variables in the following equations? East Asian Countries’s GNP Y = C + I + G + X - M U.S.’s GNP Y = C + I + G + X - M 11

For Q 4, and Q5, we will have a separate appendix for the National Income Accounting 12

13 3. Flows of Capital n International Liquidity does not stay invested in the East Asia - Monies are flowing back to U.S. n This fuels U.S. imports from Asia n This gluts U.S. financial market, pushing Stock Prices up and Interest Rates down

(A) (B) Change (B-A) Cummulative Current Account Deficits n U.S n Australia n U.K n Mexico n Japan n Germany Swiss n Singapore n Taiwan Data : IFS (billion dollar) External Liabilities (Debts) Trends

15 U.S.: Net External Liabilities (Debts) =Credit from the rest of the World

16 Data: U.S. Government Documents 1990~941995~99 (A)Post 2000 (B)Net (B – A) Total2,7105,89018,2809,690 n Asian Countires 1,2003,010 9,5006,490 n European Countries 1,1504,280 4, n Latin Americans 2101,080 1, (100 mi. $) Who are buying U.S. Bonds?

17 4. FOREX n International Capital Flows accompany the imbalance of Merchandise Flows (in the opposite direction) n Capital Flows (of Currencies) destabilize Relative Prices of Currencies or FOREX rates

18 U.S. : Current Accounts and Currency Value FOREX

19 Growth Lack of Investment Managed FOREX Consumption Rises; Savings lags Government Budget Deficits rises Current Account Deficits Export Promotions Savings Glut Capital Flows ㅇ low interests ㅇ Asians buying U.S. finan/real Assets External Liability Position Imbalance Current Account Imbalance Current Account Surplus (U.S.)(Asia, etc.) (offsetting) Recap. Current Fundamentals of World Economy 9.11