Chapter 10 Eco

International Trade and Captital

Balance of Trade (Trade balance)

The gap between a nation’s exports and its imports.

• Trade surplus: When exports are greater than imports

• Trade deficit: When imports are greater than exports

• Balanced: When imports and exports are equal

Merchandise Trade Balance

The balance of trade looking only at physical goods that are transported between countries (like cars or oil). Doesn’t include services

Current Account Balance

Broad measure of the trade balance that includes four main components

• Goods:The merchandise trade balance

• Services: Things like tourism, finance, consulting that are bought and sold internationally

• Income Payments: Money U.S. investors receive from foreign investments and payments made to foreign investors who have invested here

• Unilateral Transfers: “One-way payments” foreign aid or an individual sending money to family in another country, where nothing is received in return

Financial Capital

International flow of money that is used to facilitate trade and investment. It includes things like buying foreign stocks, real estate, or government bonds

What is the direct connection between the trade balance and financial capital flows?

The connection is an accounting identity; Mathematically the same. 

• Trade deficit: Exactly equal to the net inflow of foreign financial capital

• Trade surplus: Exactly equal to the net outflow of financial capital

National saving and investment identity

Formula showing total supply of financial capital in an economy must equal total demand for it. Connects the trade balance to domestic saving and investment

National saving and investment identity equation

Demand for financial capital = Supply of financial capital

• I + (G-T) = S + (M-X)

I = Private sector investment

(G-T) = Government borrowing (budget deficit)

S = Private savings

(M-X) = Trade deficit(Inflow of foreign capital)

How can a government deficit affect the trade deficit?

A higher budget deficit increases the demand for financial capital, which often raises interest rates. Attracts an inflow of foreign financial capital. Leads to imports cheaper and exports more expensive.

Level or Trade vs. Balance of Trade

Level of Trade: measures how much a country’s total economic production is exported. Shows how globalized an economy is

balance of trade: Dollar difference between total exports and total imports

Calculating current account balance

Current Account Balance = Trade Balance( goods and services) + Net Income Payments + Net Unilateral Transfers

The Republic of Economia had a busy year of international trade. Its factories produced and sold $500 billion worth of goods to other countries. However, its consumers also developed a taste for foreign products, purchasing $650 billion in imported goods. Economia's growing tourism and financial consultng sectors brought in $200 billion from exports of services, while its own citizens spent $150 billion on foreign services.

Economia's investors had a good year, earning $100 billion in income on their investments in other countries. At the same time, foreign investors in Economia earned and sent home $80 billion in income. Finally, the government of Economia provided $30 billion in foreign aid to neighboring developing countries.

Determine merchandise trade balance and current account balance

Calculating merchandise Trade Balance:

• exports of goods: 500 billion

• imports of goods : -650 billion

• Merchandise Trade Balance: 500 -650 = -150 billion (a deficit)

Calculating Current Account Balance:

• Goods Balance: 150 billion

• Services Balance: 200 billion (exports) - 150 billion (imports) = 50 billion

• income balance: 100 billion (recieved) - 80 billion (paid) = 20 billion

• Unilateral Transfers -30 billion

• Current Account Balance: -150 + 50 + 20 + -30 = -110 billion deficit

Republic Economia has merchandise trade deficit of 150 billion and current account deficit of 110 billion

Economists are analyzing the financial health of Macroland. They have gathered the following data for the most recent fiscal year:

• Private households and firms have saved a total of $800 billion.

• The government spent $1,200 billion but only collected $900 billion in tax revenue.

• Private firms have undertaken $1,000 billion in new investment projects.

Using the national saving and investment identity, determine Macroland's balance of trade. Is the country running a trade surplus or a trade deficit, and what is its value?

Use National saving and investment identify 

• S + (M-X) = I + (G-T)

(1200 billion (G) - 900 billion(T)) + 1000 (I) = (m-x) + 800 billion (S)

Solving it = (M-X) = 500 billion trade deficit meaning positive value means imports are larger than exports

The nation of Globalia is assessing its position in the world economy. For the year 2020, its Gross Domestic Product (GDP) was $1,827 billion. The country's businesses sold $530 billion worth of exports to other nations. An analysis of all international transactions showed that Globalia had a current account deficit of $33 billion.

Calculate Globalia’s level of trade

Current account balance as percentage of GDP

Calculating Level of trade: (Exports / GDP) * 100

(530 billion / 1827 billion) * 100 = 29.0 %

Current account balance: (current account balance/ GDP) * 100

(-33 billion / 1827 billion) * 100 = 1.8 percent

Globalias level of trade is 29.0 percent and current account balance is -1.8 % GDP