Chapter 10 Macroeconomics

Balance of Trade (trade balance)

The gap, if any, between a nation’s exports and imports

In High Income Economies…

Including the U.S.; goods comprise less than half of a country’s total production, while services comprise more than half

Merchandise Trade Balance

The balance of trade looking only at goods

Current Account Balance

A broad measure of the balance of trade that includes trade in goods and services, as well as international flows of income and foreign aid

Unilateral Transfers

Payments that government, private charities, or individuals make in which they send money abroad without receiving any direct good or service

Exports of Goods and Services as a Percentage of GDP

The dollar value of exports divided by the dollar value of a country’s GDP

Financial Capital

The international flows of money that facilitates trade and investment

Current Account Deficit

That the country is a net borrower from abroad

National Saving and Investment Identity

The total of private savings and public savings (a government budget surplus)

Supply of financial capital=Demand for financial capital

S + (M-X) = I + (G-T)

S=Saving by individuals and firms

(M-X)=Imports (M) -exports(X)= Trade Deficit

I=Private sector investment

G=Government spending

T=Taxes collected

If G>T, then the government would be a demander of financial capital.

If T>G, then the government would contribute as a supplier of financial capital.

The Connection of Domestic Saving and Investment to the Trade Balance

Explains why economists view the balance of trade as a fundamentally macroeconomic phenomenon

Trade Deficit

Trade Deficit=Domestic Investment-Prive Domestic Saving-Government (or public) savings

(M-X) = I - S - (T-G)

Trade Surplus

Trade Surplus=Private Domestic Saving+Public Saving-Domestic Investment

(X-M) = S + (T-G) - I

Level of Trade

Tells how much of its production it exports

-Separate term than the balance of trade

-Measured as the percent of exports out of GDP

3 Factors Strongly Influence a Nation’s Level of Trade

Tells how much of its production it exports

The size of its economy

Its geographic location

Its history of trade