International Economics Part 1

1. International EconomicsPart 1 Dr. Stefan Kooths BiTS Berlin(winter term 2013/2014) www.kooths.de/bits-ie

2. Contact data Dr. Stefan Kooths Deputy Head of the Forecasting Center Kiel Institute for the World Economy Office Berlin In den Ministergärten 8 10117 Berlin 030/2067-9664 bits@kooths.de www.kooths.de

3. The Kiel Institute for the World Economy

4. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

5. Outline • Introduction and Overview • Motivation, key questions, and methodology • Course scheme • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

6. Cross-border economic activity

7. International division of labor

8. Causes of Globalization (overview) • Liberalization of world trade • Liberalization of cross-border capital flows • Collapse of centrally-planned economies • Increased political/social stability • Improved transportation infrastructure • Progress in telecommunication systems/internet technologies • Creation of economic blocs (e.g. EEC/EU, NAFTA, MERCOSUR) • Spread of technological know-how via FDI • Better education for more people

9. Effects of Globalization (overview) • Generally: More choices (deeper markets) • More competition on world markets • Increased number of tradable goods and services • International competition for production sites (globally integrated value-added chains) • Accelerated structural change/more innovations(pressure on domestic labor markets) • Regulatory competition, pressure on tax and transfer systems(less latitude for national policies) • Intensified international dependencies • Net gains, but domestic winners and losers (preview)

10. Why „International Economics“ is different (and why it is not)

11. Economics and the nation state

12. Microeconomic and macroeconomic foundations

13. Methodological individualism • General method • Individuals as point of departure for economic analysis • Explaining social processes via actions of involved persons • Individuals … • … are diverse • … have exogenous preferences • … are capable of acting on their own • Subjectivism • Individual preferences • No scientific inter-subjective comparisons of utility

14. Gains from trade and voluntary contracts

15. Pitfalls of collectivist analysis

16. Outline • Introduction and Overview • Motivation, key questions, and methodology • Course scheme • Systemizing and Recording Cross-border Economic Activity • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

17. Literature, CAL software, and website • Literature • Brümmerhoff, D. (2007): VolkswirtschaftlicheGesamtrechnungen; 8. Aufl., OldenbourgVerlag: München. • Dieckheuer, G. (2001): “InternationaleWirtschaftsbeziehungen”, 5. Aufl., München/Wien. • Eibner, W. (2006): “Understanding International Trade: Theory & Policy/AnwendungsorientierteAußenwirtschaft: Theorie & Politik”, OldenbourgVerlag: München/Wien. • Kooths, S. (2000): GesamtwirtschaftlicherModellbaumit MAKROMAT; VerlagVahlen: München. • Kooths, S. (2013a): WirtschaftspolitikmitWeitwinkel; in: Frankfurter Allgemeine Zeitung, 1. Februar 2013, S. 12 („Ordnung der Wirtschaft“). • Kooths, S. and B. van Roye (2012): “Euro Area: Single Currency – National Money Creation”, Kiel Working Papers, No. 1787, Kiel. • Pugel, T, A. (2012): “International Economics”, 15th Edition, McGraw-Hill: New York. • Snower, D., J. Boysen-Hogrefe, K.-J. Gern, H. Klodt, S. Kooths, C.-F. Laaser, C. Reicher, B. van Roye, J. Scheide and K. Schrader (2013): “The Kiel Policy Package to Address the Crisis in the Euro Area”, Kiel Policy Brief, No. 58a, Kiel. • Computer-Assisted Learning software (optional) • ACTAS (www.kooths.de/actas) • MAKROMAT (www.makromat.de) • Course Website: www.kooths-de/bits-ie

18. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Balance of Payments (BoP) • The International Investment Position (IIP) • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

19. Types of cross-border transactions • Trade flows • Goods (merchandise) • Services • Cross-border incomes(compensation for use of production factors) • Labor: Compensation of employees • Capital: Investment income • Transfers • Current transfers (regularly) • Capital transfers (one-off) • Financial transactions • Nonofficial: Direct investment | Portfolio investment | Other investment • Central bank: Changes in official international reserves

20. Accounting principles:Credit and debit items (double-entry bookkeeping) • Credit item (measured with a positive sign/entry on the left side) … • … results from a transaction for which the country must be paid. It sets up the basis for a payment by a foreigner into the country – that is, it creates a monetary claim on a foreigner. • Debit item(measures with a negative sign/entry on the right side) … • … results from a transaction for with the country must pay. It sets up the basis for a payment by the country to a foreigner – that is, it creates a monetary liability against a foreigner.

21. Valuation: cif vs. fob

22. People in the BoP: Residents vs. nationals

23. Timing: Accrual principle

24. The consolidated BoPaccount

25. BoP sections I: Current vs. financial account

26. BoP sections II: The detailed BoP structure (IMF BoP Manual) • IMF Balance of Payments Manualhttp://www.imf.org/external/pubs/ft/bopman/bopman.pdf

27. Official reserve assets and the role of the central bank

28. Real-lifeBoPs Statistical Discrepancies = Net Errors andOmissions = Balance on Unclassified Transactions

29. Interpreting BoP balances (BoP and National Accounts) • Goods and services balance / trade balance (NX) • Net exports of both goods and services • Current account balance (CA) • Net credits on the flows of goods, services, income, current transfers • Financial account balance (FA) • Net credits involving changes in nonofficial foreign financial assets and liabilities • Overall balance / official settlements balance (B) • Current account balance + (nonofficial) financial account balance [+ statistical discrepancy] = ‒ Increase of official reserve assets • Link to National Accounts • NX and GDP • CA and GNI • CA + net capital transfers and Net external lending

30. Accounting exercise (Reporting country: USA) • At the end of the year, Northern Illinois (a U.S. utility company) buys $34 million in natural gas from a Canadian firm. It does not pay in cash immediately, but instead issues a promissory note saying it will pay the bill (plus interest that will accrue over time) one year later. • Brazilian soccer fans spend $6 million as tourists in the U. S. during a soccer tournament, and they pay for their hotels, meals, and transportation by using the deposits that they have at a New York bank. • The U.S. Treasury pays $25 million in interest on its past borrowing from Swiss investors, paying with checks on a New York bank. • The U.S. monetary authority (Fed) in its official role becomes concerned that the exchange rate value of the dollar may appreciate against the Japanese yen. It decides to purchase yen-denominated bank deposits from a major Tokyo bank and pay by transferring $15 million of its New York bank deposits to this Tokyo bank. • The U.S. government gives $8 million in foreign aid to the government of Egypt in the form of wheat from U.S. government stockpiles. • Mexican immigrant workers in the U.S. send $2 million from their bank accounts at a Phoenix-based bank as remittances to their families in Mexico.

31. Outline • Introduction and Overview • Systemizing and Recording Cross-border Economic Activity • The Balance of Payments (BoP) • The International Investment Position (IIP) • The Pure Theory of International Trade • Trade Policy: Free Trade vs. Protectionism • Foreign Exchange Markets and the Open Macroeconomy • Case Study: The Euro Area Crisis • Summary: The Key Lessons Learnt

32. Stocks vs. flows

33. Linking BoP and IIP

34. Transaction-based flows vs. revaluations of stocks

35. Germany: Current account, capital transfers, and IIP