1. 1 ECONOMICS 3150N Winter 2013 Professor Lazar Office: N205J, Schulich flazar@yorku.ca 736-5068

2. 2 Lecture 1: January 10 Ch. 1, 13

3. 3 Course Requirements Three tests February 7; March 14; April exam period 30%; 30%; 40% Format: 3 questions of 6 – short essays Open book: No cell phones, no wireless-enabled communication devices No excuses for missing first two tests

4. 4 Other Ground Rules No taping of lectures No cell phones in class – no texting If you need to talk to anyone, leave classroom quietly and discreetly Responsible for all chapters in text Listen before you write

5. 5 Office Hours Thursdays: 14:00-17:00 N205J, Schulich Phone: 736-5068 Email: flazar@yorku.caflazar@yorku.ca

6. 6 Introduction Does anyone know what the “equilibrium” value is for the Canadian dollar? Has the Canadian dollar become a petro or commodity currency? Does economic theory have much to tell us about exchange rates, trade patterns and capital flows? Can economic theory explain the near meltdown of the global financial system? Should Greece leave the Eurozone, or should the country be expelled? What about Quebec and Canada? Will the Eurozone survive? Should it? What is excessive risk?

7. 7 Introduction Is the annual US current account deficit (approximately US$560 billion) a problem? Should China allow its currency to appreciate? Can economic theory explain the creation and location of companies such as Apple, Bombardier, Embraer, Samsung, Siemens, Microsoft, Google, America Movil, Apotex, Wipro, ArcelorMittal, Whampoa, Flextronics, H&M, Ikea, McDonalds, Nestle, Pfizer, BHP-Billiton, Tata, Hyundai, etc.? Will the Doha round of the WTO multilateral negotiations ever end? Does Canada play “fair” in international trade? Is globalization good? Were the Occupiers right?

8. 8 Introduction Is there any hope for Africa? –Of the 24 countries with GDP per capita of less than $750 per year, 21 are in Africa –Dem. Rep. of Congo at the bottom with GDP per capita of $231 Do free trade agreements jeopardize social policies? –Should there be minimal standards in free trade agreements –Are regional free trade agreements legal under the GATT? Genetically modified foods and free trade – EU vs. the US Is the Canadian economy de-coupled from that of the US? Is anyone’s? –Will China drive world economic growth? –Will China follow the same path as Japan?

9. 9 Countries with GDP per capita < US$750 (2011) 1.Dem. Rep. of Congo ($231) 2.Burundi (271) 3.Ethiopia (357) 4.Malawi (365) 5.Liberia (374) 6.Sierra Leone (374) 7.Niger (374) 8.Guinea (430) 9.Eritrea (482) 10.Uganda (487) 11.Central African Rep. (489) 12.Madagascar (498) 13. Gambia (506) 14. Tanzania(532) 15. Mozambique (535) 16. Afghanistan (543) 17. Rwanda (583) 18. Togo (588) 19. Burkina Faso (600) 20. Nepal (619) 21. Guinea-Bissau (629) 22. Mali (669) 23. Haiti (726) 24. Zimbabwe (757)

10. 10 Introduction Are the oilsands Canada’s future? How important is infrastructure for trade? –Bridges –Pipelines –Roads Did SNC Lavalin have a choice in bidding for foreign contracts? Can everything be outsourced? –Why is anything outsourced? Will the Internet make education and health tradable? Why do people emigrate?

11. 11 Introduction What might be the trade effects of emission caps and trade systems? –Are cap and trade systems needed? Are they a fraud? Is it possible to settle trade disputes? Should there be a Tobin tax? Is international policy coordination realistic? Can sanctions work? Are free trade agreements really in our best interests?

12. 12 Objectives Globalization – what does this mean? Determinants of exchange rates – capital flows or current account balances? International capital markets – determinants of capital flows, stability, risks Exchange rate regimes Supra-national regulation of capital markets – regulatory failures Central banks and blank checks – quantitative easing –The Fed –The ECB

13. 13 Objectives Trade in goods and services – patterns, volumes, winners/losers Role of outsourcing; oil prices Trade policies – liberalized trade, protectionism Foreign ownership restrictions – the new trade barrier? –New rules restricting SOEs in Canada Role of the U.S. – will China become the engine for the world economy Need for new rules?

14. 14 Critique Limits of open economy macroeconomics Stability of capital flows – distinction between flows and stocks Momentum trading Markets and rules Returns and risk Systemic risks Adjustment mechanisms Trade theory cannot explain Airbus, Microsoft, Starbucks, Samsung Competitive vs. comparative advantages Culture Role of U.S. Interdependence and spillovers

15. 15 Markets Markets and players –What is a market? –Rules and regulations: role of governments Labor laws, anti-bribery laws, contract laws Government ownership; ownership restrictions Ex ante vs. ex post rule making – political risk Ability to influence rule makers – corruption Political stability –Market boundaries: Who’s in, who’s out? Who’s waiting to get in? Are the boundaries shifting?

16. 16 Markets Examples of laws and rules –Competition, employment, labor, contract, criminal, environment, human rights, banking, tax, trade, privacy, copyright, anti-corruption –Mark-to-market rules (EU and US), capital rules and risk weighting, bank tax, foreign ownership of financial institutions, deposit insurance

17. 17 Markets During the past 30 years, increasing emphasis by governments in Canada, the US and the UK, and to a lesser extent in other countries in the EU, South America and Asia, on using market mechanisms to achieve economic and political objectives Less reliance on regulations, crown (government-owned) corporations, and other forms of direct intervention Wave of privatizations (airports, water and electrical utilities, waste collection, education, health care, etc.), and deregulation (transportation, communications, financial services, foreign ownership limits, etc.) Governments adopted more outward-looking policies to increase competition; for example, free trade agreements – the GATT, the Canada-U.S. Free Trade Agreement, NAFTA; and a more benign stance towards foreign investment. Bi-lateral free trade agreements more common – CETA (Comprehensive Economic and Trade Agreement between Canada and EU)

18. 18 Markets Global financial crisis in 2008-09 led to increasing demands for re-regulation and more direct government intervention Sovereign debt crisis and the resulting financial crisis in Europe in 2010-12 also have resulted in demands for re-regulation But the more recent crisis has led to demands for austerity and a dramatically reduced fiscal presence by governments Germany is leading the way, and refuses to allow any European Union institution to prop up the profligate governments in Southern Europe unless these governments agree to severe belt-tightening measures

19. 19 Firms Collection of people working as team Existence of firms –Why do they exist? –What does a “firm” maximize? –Who makes the key decisions and why? Separation of ownership and control Risk taking –How is accountability managed within the firm? –How are they/how should they be organized? –Limits on risk taking – creditors, regulators, reputation

20. 20 National Income Accounting GDP: Y = C + I + G + EX – IM Current account (CU): EX – IM –Y – C – G = CU + I Nominal GDP in Canada, 2011: $1,762 billion –Consumption (C): $956 billion (54%) –Investment (I): $414 billion (23%) –Government (G): $463 billion (26%) –Exports (EX): $539 (31%) –Imports (IM): $561 billion (32%) Investment spending the smallest of the five major categories, it is also generally the most volatile. Changes in business investment spending tend to be the major driver behind changes in aggregate demand and GDP

21. Canada in the Global Economy, 2011 GDP (US$ B) 21

22. 22 World$69,110 EU17,485 1U.S.14,991 2China7,318 3Japan5,867 4Germany3,601 5France2,773 6Brazil2,477 7U.K.2,445 8Italy2,194 9Russia1,858 10India1,848 11Canada1,736 12Spain1,477

23. 23 13Australia1,379 14Mexico1,153 15South Korea1,116 16Indonesia847 17Netherlands836 18Turkey775 19Switzerland659 20Saudi Arabia577 20Sweden540 22Poland514 23Belgium514 24Norway486 25Argentina446 Top 2558,427

24. 24 Macroeconomics Top 10: $45,372 (66%) Top 25: $58,427 (85%) EU: 25% –Portugal: $237 –Italy: $2,194 –Ireland: $217 –Greece: $290 –Spain: $1,477 –PIIGS: $4,415 (6%) US: 22% Canada: 2.5% Brazil, Russia, India, China: $13,501 (20%)

25. Canada in the Global Economy, 2010 GDP per Capita (US$) 25

26. 26 1Luxembourg114,508 2Norway98,102 3Qatar92,501 4Switzerland83,383 5Macao SAR65,550 6Kuwait62,664 7Australia60,979 8Denmark59,852 9Sweden57,091 10Canada50,345 11Netherlands50,076 12Austria49,609 13Finland48,823 14Ireland48,423

27. 27 15U.S.48,112 16Belgium46,663 17Singapore46,241 18Japan45,903 19U.A.E.45,653 20Germany44,060 21Iceland43,969 22France42,377 23Brunei40,301 24U.K.39,038 Brazil12,594 Russia13,089 China5,445 India1,489

28. 28 National Income Accounting Savings: –Private savings: SP = Y – T + TR – C Taxes: income, sales, health tax, “vice” taxes, carbon Transfer payments: old age pension, employment insurance, workers’ compensation, social assistance, subsidies –Government savings: SG = T – TR – G Federal + provincial + municipal budget balances –Total savings: SP + SG = Y – C - G

29. 29 Savings SP –Deleveraging –Paradox of thrift –Relativism and savings SG –Fiscal stimulus in U.S., Canada, EU, Japan –Financing deficits – implications for interest rates, exchange rates, SP Traditional model –Is there a debt wall? Consider case of Greece, US, California

30. 30 Savings and the Current Account S = SP + SG = Y – C – G = I + CU –S > 0  I + CU > 0 –Building up capital stock and/or acquiring foreign wealth (assets) –S < 0  I + CU < 0 –Building up foreign debt to finance investment, current consumption or government spending CU = SP – I + SG –If SG , CU also may  (if SP and I do not change) –Twin deficits: CU < 0 and SG < 0

31. 31 Balance of Payments Transactions resulting in payments to foreigners (conversion of C $ into foreign currencies) enters B. of P. as debit (-ve): purchase/import of goods, services, assets Transactions resulting in receipts from foreigners (conversion of foreign currencies into C$) enters as credit (+ve): sale/export of goods, services, assets

32. 32 Balance of Payments Current Account: transactions involving goods/services –Merchandise trade –Services: tourism, transportation, financial services, business services, investment income –Sum of all current accounts across all countries = 0 U.S. and ROW –Statistical discrepancies – not all transactions captured (smuggling)

33. Canada’s Current Account (C$ B)1990200020052010 GOODS Exports152.1429.4450.2404.8 Imports141.0362.3387.8413.8 Balance11.167.062.4-9.0 SERVICES Exports22.459.767.671.3 Imports33.065.579.794.0 Balance-10.6-5.8-12.1-22.7 INVESTMENT INCOME Exports17.636.849.861.8 Imports40.269.9172.778.2 Balance-22.6-33.1-22.9-18.1 Total Balance-23.129.325.9-50.9 33

34. 15 Largest Exporters, 2011 (US$ B) China1,904 Germany1,547 U.S.1,497 Japan787 France590 South Korea553 Netherlands550 Italy525 Russia520 U.K.479 Canada463 Hong Kong438 Singapore415 Saudi Arabia365 Mexico349 World17,779 34

35. Exporters Other notable countries –India $307 B –Brazil: $256 B –U.A.E.: $282 B 35

36. 15 Largest Importers, 2011 (US$ B) U.S.2,314 China1,743 Germany1,339 Japan795 France685 U.K.655 Italy541 South Korea525 Netherlands514 Hong Kong493 India489 Canada470 Spain315 Singapore310 Mexico306 World18.000 36

37. 10 Largest Current Account Surplus Countries, 2011 (US $ B) Germany$203 China202 Saudi Arabia158 Japan119 Russia99 Netherlands81 Norway70 Singapore52 Switzerland50 Kuwait45 37

38. 10 Largest Current Account Deficit Countries, 2011 (US $ B) U.S.$473 Turkey77 Italy67 India60 France54 Brazil52 Spain52 Canada49 U.K.46 Greece29 38