Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani

Welcome to EC 382: International EconomicsBy:Dr. Jacqueline Khorassani Week Nine

Week Nine: Class 1 • Tuesday, October 30 • 14:10-15:00AC 202 • I have newly graded assignments here; please pick them up

What is antidumping law? • A law that does not allow an international firm to sell its product in an export market for less than it is sold for in its home market. • Most countries have it

What is countervailing duty • A tariff imposed by a country that is designed to increase the price of the imported good by an amount equal to any export subsidies. • Most nations have this too

Attention my dear students You must know everything in this Chapter on GATT and WTO

Multilateral Trade Round Dates Tariff Cuts # of Countries Major Negotiation Pre-GATT 1931-1947 33.2% 23 Tariffs First Round 1947 21.1 23 Tariffs Second Round 1949 1.9 13 Tariffs Third Round 1950-1951 3.0 38 Tariffs Fourth Round 1955-1956 3.5 26 Tariffs Dillion Round 1961-1962 2.4 26 Tariffs Kennedy Round 1964-1967 36.0 62 Tariffs, ag, and dumping Tokyo Round 1974-1979 29.6 99 Tariffs and NTBs Uruguay Round 1987-1994 38.0 125 Tariffs, services, agriculture Millennium Round 1999 Aborted Doha Round 2001- 142 See text for details Source: Data adapted from R.P. Lavergne Pay attention to Table 8.3:

Assignment • Due Class one, next Tuesday, November 6 • Needs to be typed • It has 20 points • You work on this alone • No duplicates • Duplicates receive zero marks

Question 1 Visit the WTO’s web page at wto.org to answer the following questions: • Is Iran a member of WTO? How about Iraq? • Which country is the newest member of WTO? • Is the following statement true or false? Explain. “WTO is for free trade at any cost.” • Is the following statement true or false? Explain. “The voting power of a nation that is a member of WTO depends on its GDP.” • What was the size of the WTO’s budget last year?

Question 2 Search the web (or elsewhere) for at least Two examples of countervailing and/or antidumping duties imposed by Ireland or Europe in the recent years. Name the products and their exporting countries and the nature of the imposed duties. Clearly list your sources.

CHAPTER 11 National Income Accounting and the Balance of Payments

What is national income accounting? • The process used to keep track of GDP and its components. • What does GDP measure? • A country’s total output per a unit of time • A country’s total income per a unit of time • Total output measured in country’s currency with goods/services measured at market prices

What is excluded from GDP? • Intermediate goods • Only final goods/services are included. Why? • To avoid multiple counting • Non-reported market transactions and activities • Informal economy • Shadow economy • Mostly to avoid paying taxes or following other regulations • Illegal goods • GDP is understated and provides a conservative estimate of country’s total economic activity

What is the difference between nominal and real GDP? • Nominal GDP • The value of GDP in current prices. • Real GDP • The value of GDP in base year prices. • How do they relate to each other? Real GDP in year t = (Nominal GDP in year t) * 100 (Price Index in year t)

What are the components of GDP? • Y = C + I + G + (X - M) Y = GDP (total production)= total income C = Public’s consumption of goods and services I = private business firms’ investment in equipment, software, structures, and changes in business inventories, and residential investment G = The purchase of goods and services (even investment goods) by government X = Exports of goods and services M = Imports of goods and services

Ireland’s Real GDP in millions of €(source: Central Statistics Office- Ireland) http://www.cso.ie

International Economics • Week Nine- Class 2 • Wednesday, October 31 • 11:10-12:00 • Tyndall

Don’t forget the Assignment • Due Class one, next Tuesday, November 6 • Needs to be typed • It has 20 points • You work on this alone • No duplicates • Duplicates receive zero marks

Are second hand sales in GDP? • No • GDP measures the value of newly produced goods and services only.

Irish Nominal GDP components in 2006 (millions of €)(source: Central Statistics Office- Ireland)

Stock: Is measured at a given point in time Flow: Is measured per unit of time Flow/Stock Variables

What are these variables, flow or stock? • GDP • Price index • Exports • Unemployment rate

What is X-M equal to? • X-M is net exports or the trade balance = exports of goods and services minus imports of goods and services • Y + C + G + I + (X-M) • X-M = Y – (C + I + G) • Trade Balance = domestic production (supply) – domestic expenditures (demand)

If Y< (C+I+G)  X<M  Trade deficit • Our income (production, supply) is less than our expenditures (demand) or we produce less than we consume domestically • We are borrowing from foreigners • flow or stock? • Our international indebtedness increases • flow or stock?

This means that in the future • Deficits must be paid by producing more than consuming (exporting future consumption). • Trade deficit is the process of importing present consumption and exporting future consumption.

If Y> (C+I+G) X>M Trade surplus • Our income (production) is more than our expenditures or we produce more than we consume domestically • We are lending to foreigners • flow or stock? • Our international indebtedness decreases • flow or stock?

This means that in the future • our domestic production will be less than our expenditures  importing future consumption.

Trade imbalances denote a country’s preference for present versus future consumption • Intertemporal Trade • Countries trading production for consumption at different points in time.

Production and Income • We know that • GDP = C + I + G + (X-M) = Y • We also know that • Y = T + C + S • This means that • C + I + G + X - M = T + C + S • I + G + X – M = T + S • I + G + X = T + S + M

Injections and leakages • I + G + X = T + S + M • The left side items are all expenditures on domestic output  create income in the country  injections in the income stream • The right side items are all monies not spent on domestic output don’t create income in the country leakages from the income stream

Trade balance, private saving, government saving and business investment • I + G + X = T + S + M • (X – M) = (T- G) + (S – I) • Trade balance = government saving + (private saving – business investment) • What causes the trade deficit? • Budget deficit? • Low amount of saving relative to investment?

How could we reduce trade deficit? (X – M) = (T- G) + (S – I) • 4 strategies to reduce trade imbalance: • Increasing the level of savings to reduce the trade deficit • Reduce the level of investment • Increase taxes • Reduce government spending

International Economics • Week Nine- Class 3 • Wednesday, October 31 • 15:10-16:00 • AC 201

Don’t forget the Assignment • Due Class one, next Tuesday, November 6 • Needs to be typed • It has 20 points • You work on this alone • No duplicates • Duplicates receive zero marks

What is the balance of payments account? • A summary of all the international transactions of a country’s residents with the rest of the world during a year. • Composed of different accounts

In general • Any transaction resulting in money (€) flowing into a country is a credit and has a positive sign • Any transaction resulting in money (€) flowing out of the country is a debit and has a negative sign

Goods & Services Balance • Merchandise Balance • Exports of goods – imports of goods • Balance on Goods & Services • Merchandise Balance + export of services – import of services

Current Account Balance • Balance on goods and services + income received from investments abroad – income paid to foreigners on their investments in the country + unilateral transfers received – unilateral transfers sent abroad. • Unilateral Transfers: • Grants or gifts extended to or received from other countries

Ireland Current Account Balance (millions of €)

Examples of Capital Account (financial assets, non-financial assets, official reserves) Items • Irish resident buys shares of US stock (financial asset) • Money leaves country  domestic holdings of foreign assets goes up debit  negative sign • American buys a right to produce something in Ireland (franchise, non financial asset) • Money enters the country foreign holdings of domestic assets goes up  credit positive sign • Irish government sells dollars (official reserve) • Money (€) enters the country  Domestic holding of foreign assets goes down  credit  positive sign

The Capital Account Balance • Net increase in foreign holdings of domestic assets - Net increase in domestic holdings of foreign assets

The Balance of Payments (BOP) • BOP = Current account balance+ capital account balance + statistical discrepancy = 0 • Why?

Why is the balance of payments zero? • Example • 2 countries: US & Ireland • US has no €; Ireland has no $ • US buys Irish sweater for $1000 • US Current account balance = ? • -$1000 • US pays $1000 to Irish exporter or US gives and IOU (a $1000 bond) to Irish Exporter • Is this a capital inflow or capital outflow? • Inflow • US Capital account balance = ? • +$1000

ICA 5: Find (1) merchandise balance, (2) goods and services balance, (3) current account balance, (4) capital account balance and (5) statistical discrepancy in Ireland • Ireland exports €50 worth of shoes • A German tourist gets a hair cut in Galway (€30) • Ireland imports €100 worth of TVs • Irish government sends €10 worth of aid to Afghanistan • A Japanese buys €90 Irish government bond • An Irish tourist goes to movies in Germany (€15) • An Irish buys a €55 German bond.

Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani